Deriving and explaining the weighted cost of capital The Wikipedia article for the "weighted cost of capital" (WACC) defines the WACC
as "the rate that a company is expected to pay on average to all its security holders to finance its assets." What exactly does this mean? Does this mean that this is supposed to be the expected returns on the company's stocks as well as the expected return on the company's bonds? Also, how are the two equations, given in the Wikipedia article, derived? For convenience, the two equations are the following. The first is
$$
\text{WACC} = \frac{\sum_{i=1}^N r_i \cdot MV_{i}}{\sum_{i=1}^N MV_i}, \tag{1}
$$
where $N$ is the number of sources of capital (securities, types of liabilities); $r_i$ is the required reate of return for security $i$; and $MV_i$ is the market value of all outstanding securities $i$. The second is
$$
\text{WACC}  = \frac{D}{D+E}K_d + \frac{E}{D+E}K_e \tag{2},
$$
where $D$ is the total debt, $E$ is the total shareholder’s equity, $Ke$ is the cost of equity, and $Kd$ is the cost of debt. 

EDIT:
Thanks for the answers below. "Derivation" was too strong of a word to use, which was clear after the explanations given. It was just a little unclear what the objects were in practice. The discussions below clarified things. Also, I found this paragraph from a website linked in one of the answers helpful:


  To understand WACC, think of a company as a bag of money. The money in the bag comes from two sources: debt and equity. Money from business operations is not a third source because, after paying for debt, any cash left over that is not returned to shareholders in the form of dividends is kept in the bag on behalf of shareholders. If debt holders require a 10% return on their investment and shareholders require a 20% return, then, on average, projects funded by the bag of money will have to return 15% to satisfy debt and equity holders. The 15% is the WACC.
If you are asking "Is the WACC the amount that the company expects to earn on the stocks and bonds that it holds.." then the answer is no. 

The WACC, in very simple terms, is the amount of money a company pays to obtain financing for projects. These types of financing are clearly listed in the wikipedia article and clearly extend beyond stocks and bonds issued by the company. 

A company can calculate the WACC to determine whether or not undertaking a project will be profitable. That is, a company can determine that it must earn some minimum return on a project before that project becomes profitable. 

You, as a consumer, possibly have experience with cost of capital. Consider the interest paid on a car loan. That interest is the cost you incur for financing the purchase of your vehicle by borrowing funds from a financial intermediary. 

As far as derivation goes - I'm not sure how to simplify these formulas much more. However, you can think simply about the first as the ratio of the interest paid out on sources of financing and the total market value of those sources of financing (so...some ration &lt; 1) and the second is a more simple case of the first. 

http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/wacc.aspx

I think this website gives a decent walkthrough of the concept. Hope this helps some.