WACC (Weighted Average Cost of Capital) Calculator
What is WACC?
Weighted Average Cost of Capital (WACC) represents a firm's average cost of capital from all sources, including common stock, preferred stock, bonds, and other long-term debt. It is 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
The calculation weights each component of capital based on its proportion in the firm's total capital structure, while adjusting the cost of debt for tax benefits.
WACC = (E/V × Re) + [(D/V × Rd) × (1 – Tc)]
- E: Market value of equity
- D: Market value of debt
- V: Total value (E + D)
- Re: Cost of equity
- Rd: Cost of debt
- Tc: Corporate tax rate
Example Calculation
Imagine a company with the following financial profile:
| Component | Value |
|---|---|
| Market Value of Equity (E) | $600,000 |
| Market Value of Debt (D) | $400,000 |
| Cost of Equity (Re) | 12% |
| Cost of Debt (Rd) | 6% |
| Tax Rate (Tc) | 25% |
1. Total Value (V) = $600,000 + $400,000 = $1,000,000
2. Equity Weight = 60%, Debt Weight = 40%
3. After-tax Cost of Debt = 6% × (1 – 0.25) = 4.5%
4. WACC = (0.60 × 12%) + (0.40 × 4.5%) = 7.2% + 1.8% = 9.0%
Why WACC Matters
Financial analysts use WACC as the discount rate when performing a Discounted Cash Flow (DCF) analysis. It serves as a hurdle rate for companies; projects with an expected return lower than the WACC should generally not be pursued, as they destroy shareholder value.