Calculate the Weighted Average Cost of Capital (WACC) to determine the minimum return a company must earn on its asset base to satisfy creditors and owners.

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WACC Calculator: Weighted Average Cost of Capital

Example

Input: Equity $1M, Debt $500k, Re 8%, Rd 5%, Tax 21%

Result: 6.65% WACC

Step-by-Step Guide

  1. Determine Capital Structure: Input the market value of the company's Equity (Market Cap) and Debt. The tool calculates the total value (V).
  2. Input Cost of Equity: Enter the required rate of return for shareholders (Re). This is often calculated using the CAPM model based on beta and market risk.
  3. Input Cost of Debt: Enter the effective interest rate (Rd) the company pays on its loans and bonds.
  4. Apply Tax Shield: Enter the Corporate Tax Rate. The tool adjusts the cost of debt to account for tax deductibility.

What is WACC Calculator: Weighted Average Cost of Capital?

The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average rate a company expects to pay to finance its assets. It is calculated by weighting the cost of each capital component—equity and debt—according to their proportion in the company's capital structure. WACC serves as the 'hurdle rate' for investment decisions; if a new project cannot generate a return (ROIC) higher than the WACC, it will destroy shareholder value. It is widely used in Discounted Cash Flow (DCF) analysis to discount future cash flows back to their present value.
⚠️ Important: Financial figures generated here are for planning purposes. Actual results may vary based on market conditions and individual circumstances.

How it Works

The WACC calculation blends the cost of equity and the after-tax cost of debt. Formula: $ WACC = \left(\frac{E}{V} \times Re\right) + \left(\frac{D}{V} \times Rd \times (1 - T)\right) $ Where: * **E** = Market value of equity * **D** = Market value of debt * **V** = Total value of capital (E + D) * **Re** = Cost of equity (often derived via CAPM) * **Rd** = Cost of debt (interest rate) * **T** = Corporate tax rate Note that interest payments on debt are tax-deductible, which creates a 'tax shield' that lowers the effective cost of debt.

FAQ

Why is the cost of debt multiplied by (1-T)?

Because interest expenses are tax-deductible, the net cost to the company is lower than the nominal interest rate. This 'tax shield' encourages the use of debt financing.

What is a 'good' WACC?

It varies by industry. Stable utility companies might have a WACC of 4-6%, while volatile tech startups could be 10-15% or higher. Lower is generally better.

Should I use book value or market value?

Always use market values for Equity and Debt when possible, as they reflect the current economic reality and expectations of investors.

How does WACC relate to ROI?

WACC is the benchmark. If a project's Return on Investment (ROI) or Internal Rate of Return (IRR) exceeds the WACC, the project is profitable.

Where do I find Cost of Equity?

It is not directly observable. Use the CAPM calculator to estimate it based on the stock's Beta and the risk-free rate.

Conclusion

Understanding WACC is fundamental for corporate finance and valuation. A lower WACC indicates a cheaper cost of funding and a higher valuation for the company's future cash flows. However, artificially lowering WACC by taking on excessive debt increases financial risk (beta), which eventually drives the cost of equity back up. This calculator helps find the optimal balance.

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References & Standards

This calculator uses formulas and data standards from Standard References to ensure accuracy.

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