How Do I Calculate Wacc

Calculate your company's Weighted Average Cost of Capital (WACC).

Understanding WACC

The Weighted Average Cost of Capital (WACC) is a financial metric that represents a company's blended cost of capital across all sources, including common stock, preferred stock, bonds, and other forms of debt. It is commonly used by companies to discount future cash flows of a project or investment when determining its Net Present Value (NPV). A lower WACC generally indicates a company is managing its capital more efficiently.

The WACC Formula

The formula for WACC is as follows:

WACC = (E/V) * Re + (D/V) * Rd * (1 – Tc)

Where:

• E = Market Value of Equity
• D = Market Value of Debt
• V = Total Market Value of the Company (E + D)
• Re = Cost of Equity
• Rd = Cost of Debt
• Tc = Corporate Tax Rate

Breakdown of Components:

• Market Value of Equity (E): This is calculated by multiplying the current stock price by the total number of outstanding shares.
• Market Value of Debt (D): This represents the total market value of all the company's outstanding debt.
• Cost of Equity (Re): This is the return a company requires to compensate its equity investors. It's often calculated using models like the Capital Asset Pricing Model (CAPM).
• Cost of Debt (Rd): This is the interest rate a company pays on its borrowed funds. It's often the yield to maturity (YTM) on the company's outstanding long-term debt.
• Corporate Tax Rate (Tc): This is the company's effective tax rate. The cost of debt is tax-deductible, which is why the formula includes the (1 – Tc) term to reflect the tax shield.
• Total Market Value (V): This is simply the sum of the market value of equity and the market value of debt (V = E + D).

How to Use the Calculator:

1. Input the Market Value of Equity for your company.
2. Input the Market Value of Debt for your company.
3. Enter the Cost of Equity as a percentage (e.g., 12.5 for 12.5%).
4. Enter the Cost of Debt as a percentage (e.g., 5.0 for 5.0%).
5. Input your company's effective Corporate Tax Rate as a percentage (e.g., 25.0 for 25.0%).
6. Click "Calculate WACC".

Use Cases for WACC:

• Investment Appraisal: WACC is used as the discount rate in Net Present Value (NPV) and Internal Rate of Return (IRR) calculations to evaluate the profitability of potential projects or investments.
• Valuation: It's crucial for discounted cash flow (DCF) analysis, a common method for valuing a company.
• Performance Evaluation: WACC can be compared to a company's return on invested capital (ROIC) to assess whether the company is creating value.
• Capital Budgeting Decisions: Helps management decide which projects to fund based on their expected returns relative to the cost of capital.

Remember that WACC is an estimate and can fluctuate based on market conditions, company performance, and changes in capital structure.