Calculate the Weighted Average Cost of Capital Example
A professional financial tool to compute WACC with real-time analysis, charts, and detailed explanations.
Total market value of the company's outstanding shares ($).
Please enter a valid positive number.
The return rate required by equity shareholders (%).
Total market value of the company's debt ($).
The effective interest rate the company pays on its debt (%).
The corporate tax rate applicable to the company (%).
Weighted Average Cost of Capital (WACC)
8.06%
WACC = (71.4% × 10.5%) + (28.6% × 5.0% × (1 – 21%))
Equity
Debt
Figure 1: Capital Structure Weighting
Capital Structure Breakdown
| Component | Market Value ($) | Weight (%) | Cost Component |
|---|
What is "Calculate the Weighted Average Cost of Capital Example"?
When financial analysts need to assess the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital, they look to calculate the weighted average cost of capital example. WACC represents the average rate that a business must pay to finance its assets.
Understanding how to calculate the weighted average cost of capital example is crucial for corporate finance professionals, investors, and business owners. It serves as a benchmark for evaluating investment projects; if a new project's return is lower than the WACC, it may decrease the company's value. Conversely, a return higher than the WACC indicates value creation.
A common misconception is that WACC is static. In reality, it fluctuates with market conditions, changes in the company's capital structure, and shifts in tax legislation.
WACC Formula and Mathematical Explanation
The formula used to calculate the weighted average cost of capital example blends the cost of equity and the after-tax cost of debt, weighted by their respective proportions in the total capital structure.
WACC = (E/V × Re) + (D/V × Rd × (1 – t))
| Variable | Meaning | Unit | Typical Range |
|---|---|---|---|
| E | Market Value of Equity | Currency ($) | Positive |
| D | Market Value of Debt | Currency ($) | Positive |
| V | Total Value (E + D) | Currency ($) | Positive |
| Re | Cost of Equity | Percentage (%) | 6% – 15% |
| Rd | Cost of Debt | Percentage (%) | 2% – 8% |
| t | Corporate Tax Rate | Percentage (%) | 15% – 30% |
Practical Examples (Real-World Use Cases)
Example 1: The Tech Startup
Imagine a tech startup wants to calculate the weighted average cost of capital example to pitch to investors. They have $2,000,000 in equity with a high cost of equity at 15% due to risk. They have $500,000 in debt at a 6% interest rate. The corporate tax rate is 21%.
- Total Value (V): $2,500,000
- Weight of Equity: 80%
- Weight of Debt: 20%
- WACC Calculation: (0.80 × 15%) + (0.20 × 6% × (1 – 0.21)) = 12% + 0.948% = 12.95%
The startup must generate returns typically above 13% to be attractive.
Example 2: The Established Manufacturer
A stable manufacturing firm has $10,000,000 in equity (Cost: 8%) and $10,000,000 in debt (Cost: 4%). Tax rate is 25%.
- Total Value (V): $20,000,000
- Weight of Equity: 50%
- Weight of Debt: 50%
- WACC Calculation: (0.50 × 8%) + (0.50 × 4% × 0.75) = 4% + 1.5% = 5.5%
This lower WACC allows the manufacturer to take on projects with lower returns that are still profitable.
How to Use This WACC Calculator
- Enter Equity Value: Input the total market value of all outstanding shares. Do not use book value.
- Enter Cost of Equity: Use the CAPM model result or your expected shareholder return rate.
- Enter Debt Value: Input the total market value of bonds and long-term loans.
- Enter Cost of Debt: Input the pre-tax interest rate on your debt.
- Enter Tax Rate: Input the marginal corporate tax rate to account for the tax shield on interest.
- Review Results: The tool will instantly calculate the weighted average cost of capital example percentages.
Key Factors That Affect WACC Results
When you calculate the weighted average cost of capital example, several macroeconomic and microeconomic factors influence the outcome:
- Interest Rates: As central banks raise rates, the cost of debt (Rd) increases, pushing WACC up.
- Stock Market Volatility: Higher volatility increases the Beta in CAPM, raising the Cost of Equity (Re) and WACC.
- Tax Rates: Higher tax rates actually lower WACC because interest payments on debt are tax-deductible, creating a larger "tax shield."
- Capital Structure: Shifting the mix between debt and equity changes the weights. Since debt is usually cheaper than equity, adding debt can lower WACC up to a point where bankruptcy risk rises.
- Credit Rating: A downgrade in credit rating increases the interest rate lenders demand, increasing the Cost of Debt.
- Economic Stability: In unstable economies, investors demand higher risk premiums, increasing both Cost of Equity and Debt.
Frequently Asked Questions (FAQ)
Why is the tax rate included in the WACC formula?
Interest expenses on debt are tax-deductible for corporations. This creates a "tax shield," effectively reducing the actual cost of debt paid by the company. We multiply Rd by (1-t) to reflect this savings.
Should I use Book Value or Market Value?
Always use Market Value when you calculate the weighted average cost of capital example. Market value reflects the current economic reality and what it would cost to raise capital today, whereas book value is historical.
What is a "good" WACC?
A "good" WACC depends on the industry. Tech companies might have a WACC of 10-15%, while utilities might have 4-6%. Generally, a lower WACC represents cheaper funding and higher value potential.
Can WACC be negative?
No, WACC cannot be negative. Investors always expect a positive return for providing capital.
How does WACC relate to ROI?
WACC is the "hurdle rate." For a project to add value, its Return on Investment (ROI) or Internal Rate of Return (IRR) must exceed the WACC.
Does a small business need WACC?
Yes. Even small businesses need to understand their cost of funds to ensure they aren't borrowing money at 10% to invest in projects that only return 5%.
What if the company has no debt?
If a company has no debt, its WACC is simply equal to its Cost of Equity (Re).
Does WACC change over time?
Yes, constantly. It changes with stock prices, interest rates, and tax laws. It should be recalculated regularly.
Related Tools and Internal Resources
Enhance your financial modeling with these related calculators and guides:
- Cost of Equity Calculator Estimate shareholder return expectations using CAPM.
- Debt to Equity Ratio Analyze your capital structure leverage and risk.
- Return on Investment (ROI) Tool Compare your project returns against your WACC.
- CAPM Calculator Calculate the expected return on an asset based on beta and market risk.
- Intrinsic Value Calculator Determine the true value of a stock using discounted cash flows.
- Financial Ratios Guide A comprehensive guide to liquidity, solvency, and profitability ratios.