What are the three components required in calculating the weighted average cost of capital (WACC)?

The calculation of the weighted average cost of capital (WACC) incorporates three critical components: the cost of equity, the cost of debt, and the cost of any preferred stock, weighted according to their proportions in the firm's overall capital structure.

The marginal tax rate is particularly important because it affects the after-tax cost of debt financing. Since interest payments on debt are tax-deductible, the effective cost of debt is reduced by the tax savings, making it crucial for an accurate WACC calculation. This reflects the true cost to the company of financing through debt compared to equity, which does not carry those tax benefits.

Additionally, the WACC reflects the firm's market value rather than book value because market values represent the current perception of the company's risk and return by investors. This is essential in evaluating investment opportunities and making financial decisions that align with market expectations.

In summary, the correct components required for calculating WACC encompass the effective costs associated with debt (adjusted for tax), any preferred stock, and overall capital structure considerations based on market values, which collectively guide a firm's investment and financing strategies.