Our WACC Calculator is designed to help investors and financial analysts easily calculate the Weighted Average Cost of Capital (WACC) for a company.

By inputting key financial metrics, users can determine the overall cost of capital, which is crucial for evaluating investment opportunities and corporate finance decisions. This tool provides insights into a company’s capital structure and aids in assessing its financial health and valuation.

WACC Calculator

WACC Calculator

%
ⓘ Enter the cost of equity as a percentage.
$
ⓘ Enter the market value of equity in dollars.
%
ⓘ Enter the cost of debt as a percentage.
$
ⓘ Enter the market value of debt in dollars.
%
ⓘ Enter the corporate tax rate as a percentage.

How to Use the WACC Calculator

  1. Cost of Equity (rE): Enter the company’s cost of equity as a percentage. This represents the return required by equity investors for their investment risk. You can often find this value through market analysis or financial reports.
  2. Equity (E): Enter the total market value of the company’s equity in dollars. This is typically calculated as the current stock price multiplied by the number of outstanding shares.
  3. Cost of Debt (rD): Enter the company’s cost of debt as a percentage. This reflects the effective interest rate paid by the company on its debts and can be determined from the company’s financial statements.
  4. Debt (D): Enter the total market value of the company’s debt in dollars. This includes all interest-bearing liabilities and can usually be found in the balance sheet.
  5. Corporate Tax Rate (t): Enter the corporate tax rate as a percentage. This rate impacts the net cost of debt due to tax deductibility of interest expenses.

Once all the fields are filled in, click the “Calculate” button to determine the Weighted Average Cost of Capital (WACC).

The WACC result will display the overall cost of capital for the company, which is used to assess investment opportunities and measure the efficiency of the capital structure.

How to Calculate Weighted Average Cost of Capital

To calculate the Weighted Average Cost of Capital, you need to consider both the cost of equity and the cost of debt, along with the proportion each contributes to the company’s total capital structure.

The WACC formula is as follows:

\(\text{WACC} = \left(\frac{E}{E + D}\right) \times r_E + \left(\frac{D}{E + D}\right) \times r_D \times (1 – t)\)

Where:

  • E = Market value of equity
  • D = Market value of debt
  • rE = Cost of equity
  • rD = Cost of debt
  • t = Corporate tax rate

The formula calculates the weighted cost of each component of capital—equity and debt—adjusted for their respective proportions in the total capital structure. The tax rate is used to adjust the cost of debt, as interest expenses are tax-deductible, effectively reducing the cost of debt financing.

By using WACC, businesses can make informed decisions about financing, project evaluation, and capital budgeting. It serves as a benchmark for determining whether to proceed with investments based on whether expected returns exceed the WACC.

Practical Example: Calculating WACC

Let’s consider a fictional company, TechCorp, which is evaluating its Weighted Average Cost of Capital (WACC) to make informed investment decisions. Below are the relevant financial figures:

  • Market Value of Equity (E): $500 million
  • Market Value of Debt (D): $300 million
  • Cost of Equity (rE): 8%
  • Cost of Debt (rD): 5%
  • Corporate Tax Rate (t): 25%

Using the WACC formula:

\(\text{WACC} = \left(\frac{E}{E + D}\right) \times r_E + \left(\frac{D}{E + D}\right) \times r_D \times (1 – t)\)

We substitute the values into the formula:

\(\text{WACC} = \left(\frac{500}{500 + 300}\right) \times 0.08 + \left(\frac{300}{500 + 300}\right) \times 0.05 \times (1 – 0.25)\)

Simplifying the calculations:

\(\text{WACC} = \left(\frac{500}{800}\right) \times 0.08 + \left(\frac{300}{800}\right) \times 0.05 \times 0.75\) \(\text{WACC} = 0.625 \times 0.08 + 0.375 \times 0.0375\) \(\text{WACC} = 0.05 + 0.0140625\)
\(\text{WACC} = 0.0640625 \text{ or } 6.41\%\)

Thus, the WACC for TechCorp is 6.41%. This means that the company’s average cost of capital, considering both equity and debt, is 6.41%. TechCorp should aim to achieve a return on investments that exceeds this rate to ensure profitable growth and value creation for its stakeholders.

Definition of WACC

The Weighted Average Cost of Capital (WACC) is a financial metric that represents a company’s average cost of capital, considering both equity and debt.

It reflects the average rate of return a company must pay to finance its assets and operations. The WACC is used by investors and analysts to evaluate investment opportunities and determine the minimum acceptable return for a project.

The formula to calculate the Weighted Average Cost of Capital is:

WACC is crucial for financial decision-making as it helps assess the cost of funding new projects and investments. A lower WACC indicates that a company can fund its operations at a lower cost, potentially leading to higher profitability and growth.

Conversely, a higher WACC suggests that the company faces higher capital costs, which can affect its competitive position and financial health.

MORE FINANCE-TOOLS:

 

 

 

4.8/5 - (55 votes)