Weighted Average Cost of Capital (WACC) Calculator
Determine your company's cost of capital by weighting the cost of equity and the after-tax cost of debt using this precise WACC calculator.
Weighted Average Cost of Capital
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What is WACC?
The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average rate a company must pay to finance its assets. It is calculated by averaging the cost of all sources of capital (equity and debt), weighted by their respective proportions in the company's capital structure.
Companies use WACC as a "hurdle rate" to evaluate investment opportunities. If an investment project has an internal rate of return (IRR) higher than the WACC, it is generally considered value-accretive to the company.
WACC = (E/V × Re) + [(D/V × Rd) × (1 – T)]
Understanding the Inputs
- Market Value of Equity (E): The total market capitalization of the company (Share Price × Total Shares Outstanding).
- Market Value of Debt (D): The total market value of the company's short-term and long-term debt.
- Cost of Equity (Re): The return required by equity shareholders, often calculated using the Capital Asset Pricing Model (CAPM).
- Cost of Debt (Rd): The effective rate that a company pays on its current debt.
- Corporate Tax Rate (T): The applicable tax rate, which provides a "tax shield" because interest payments on debt are often tax-deductible.
Example Calculation
Imagine a company with a capital structure consisting of $1,000,000 in equity and $500,000 in debt. The cost of equity is 8%, the cost of debt is 5%, and the corporate tax rate is 25%.
First, we calculate the total value (V) = $1,000,000 + $500,000 = $1,500,000.
- Equity Weight (E/V) = 1,000,000 / 1,500,000 = 66.67%
- Debt Weight (D/V) = 500,000 / 1,500,000 = 33.33%
Then we apply the WACC formula:
WACC = (0.6667 × 0.08) + [(0.3333 × 0.05) × (1 – 0.25)]
WACC = 0.0533 + [0.0166 × 0.75]
WACC = 0.0533 + 0.0125 = 0.0658 or 6.58%
Why does WACC matter for SEO and Business?
Understanding financial health is crucial for business valuation. A lower WACC indicates a healthy business that can attract investors cheaply, whereas a high WACC implies higher risk. When performing valuation analysis or Discounted Cash Flow (DCF) modeling, WACC is the discount rate used to bring future cash flows back to present value.