Weighted Average Cost of Capital (WACC) Calculator
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Understanding WACC
The Weighted Average Cost of Capital (WACC) is a financial metric used to represent a company's blended cost of capital across all sources, including common stock, preferred stock, bonds, and other forms of debt. It is calculated by taking the weighted average of the cost of each capital component, weighted by its proportion in the company's capital structure. WACC is a crucial figure for businesses as it represents the minimum rate of return that a company must earn on its existing asset base to satisfy its creditors, owners, and other capital providers.
The WACC Formula
The most common formula for WACC is:
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 Capital (E + D)
Re = Cost of Equity
Rd = Cost of Debt
Tc = Corporate Tax Rate
The term Rd * (1 - Tc) represents the after-tax cost of debt, as interest payments on debt are typically tax-deductible, reducing the effective cost of borrowing for the company.
Key Components Explained:
Market Value of Equity (E): This is the total market value of a company's outstanding shares. It's calculated by multiplying the current share price by the number of outstanding shares.
Market Value of Debt (D): This represents the total market value of all of a company's debt. For publicly traded debt, it's the market price of the bonds. For non-traded debt, book value is often used as a proxy.
Cost of Equity (Re): This is the return a company requires to compensate its equity investors for the risk of owning the stock. It's often estimated using models like the Capital Asset Pricing Model (CAPM).
Cost of Debt (Rd): This is the effective interest rate a company pays on its current debt. It can be estimated by looking at the yields on the company's outstanding bonds.
Corporate Tax Rate (Tc): This is the company's marginal corporate tax rate.
How to Use This Calculator:
Market Value of Equity (E): Enter the total market capitalization of the company.
Market Value of Debt (D): Enter the total market value of the company's debt.
Cost of Equity (Re): Input the required rate of return for equity investors (as a percentage).
Cost of Debt (Rd): Input the current interest rate on the company's debt (as a percentage).
Corporate Tax Rate (Tc): Enter the company's effective corporate tax rate (as a percentage).
Click "Calculate WACC" to see the result.
Use Cases for WACC:
Investment Appraisal: WACC is commonly used as the discount rate in Net Present Value (NPV) and Internal Rate of Return (IRR) calculations to evaluate potential projects. A project's expected return should exceed the WACC to be considered value-adding.
Valuation: It's used in discounted cash flow (DCF) models to determine the intrinsic value of a company.
Performance Measurement: Companies can compare their actual returns against their WACC to gauge performance.
Capital Budgeting Decisions: WACC helps companies decide which projects to undertake, prioritizing those expected to generate returns above this cost.
A lower WACC generally indicates a more attractive investment and a more efficient capital structure, as the company is financing its operations at a lower cost.
function calculateWACC() {
var marketValueEquity = parseFloat(document.getElementById("marketValueEquity").value);
var marketValueDebt = parseFloat(document.getElementById("marketValueDebt").value);
var costOfEquity = parseFloat(document.getElementById("costOfEquity").value);
var costOfDebt = parseFloat(document.getElementById("costOfDebt").value);
var corporateTaxRate = parseFloat(document.getElementById("corporateTaxRate").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous result
if (isNaN(marketValueEquity) || isNaN(marketValueDebt) || isNaN(costOfEquity) || isNaN(costOfDebt) || isNaN(corporateTaxRate)) {
resultElement.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (marketValueEquity < 0 || marketValueDebt < 0 || costOfEquity < 0 || costOfDebt < 0 || corporateTaxRate < 0) {
resultElement.innerHTML = "Input values cannot be negative.";
return;
}
var totalValue = marketValueEquity + marketValueDebt;
if (totalValue === 0) {
resultElement.innerHTML = "Total Market Value (E+D) cannot be zero.";
return;
}
var weightEquity = marketValueEquity / totalValue;
var weightDebt = marketValueDebt / totalValue;
// Convert percentages to decimals
var costOfEquityDecimal = costOfEquity / 100;
var costOfDebtDecimal = costOfDebt / 100;
var corporateTaxRateDecimal = corporateTaxRate / 100;
// Calculate WACC
var wacc = (weightEquity * costOfEquityDecimal) + (weightDebt * costOfDebtDecimal * (1 – corporateTaxRateDecimal));
// Format result to percentage with two decimal places
var formattedWACC = (wacc * 100).toFixed(2);
resultElement.innerHTML = "WACC: " + formattedWACC + "%";
}