Please enter valid positive numbers for all fields.
Weighted Average Cost of Capital
0.00%
Total Capital (V)
$0
Weight of Equity
0%
Weight of Debt
0%
Understanding the WACC Calculator
The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average rate a company is expected to pay to all its security holders to finance its assets. This WACC calculator helps financial analysts, investors, and business owners determine the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital.
The WACC Formula
WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing the results. The standard formula used in this calculator is:
WACC = (E/V × Re) + [(D/V × Rd) × (1 – t)]
Where:
E = Market value of the firm's equity
D = Market value of the firm's debt
V = Total value of capital (E + D)
Re = Cost of equity
Rd = Cost of debt
t = Corporate tax rate
How to Use This Calculator
To get an accurate WACC calculation, follow these steps:
Market Value of Equity: Enter the total market capitalization of the company (Current Share Price × Total Shares Outstanding).
Market Value of Debt: Enter the total market value of the company's interest-bearing debt.
Cost of Equity: Input the expected return required by equity investors. This is often calculated using the CAPM (Capital Asset Pricing Model).
Cost of Debt: Input the effective interest rate the company pays on its debt.
Corporate Tax Rate: Enter the applicable corporate tax rate to account for the tax shield benefit of interest payments.
Why is WACC Important?
WACC serves as a critical benchmark in corporate finance:
Investment Decisions: Companies use WACC as a "hurdle rate" to evaluate merger and acquisition targets or new projects. If a project's return (ROIC) exceeds the WACC, it creates value.
Valuation: In Discounted Cash Flow (DCF) analysis, WACC is used as the discount rate to calculate the Net Present Value (NPV) of future cash flows.
Performance Metric: It helps assess whether the management is generating sufficient returns for shareholders compared to the cost of funding.
Example Calculation
Consider a company with the following financial data:
Market Value of Equity: $1,000,000
Market Value of Debt: $500,000
Cost of Equity: 10%
Cost of Debt: 5%
Tax Rate: 25%
First, calculate Total Value (V): $1,000,000 + $500,000 = $1,500,000.
Weight of Equity (E/V): 1,000,000 / 1,500,000 = 0.67 (67%)
Weight of Debt (D/V): 500,000 / 1,500,000 = 0.33 (33%)