Weighted Average Cost of Capital (WACC) Calculator
What is WACC?
The Weighted Average Cost of Capital (WACC) represents a company's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of 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
- E: Market Value of Equity
- D: Market Value of Debt
- V: Total Value of Capital (E + D)
- Re: Cost of Equity
- Rd: Cost of Debt
- T: Corporate Tax Rate
How to Interpret WACC
WACC is used by corporate directors to determine the feasibility of mergers and other expansionary opportunities. It is the discount rate used for Cash Flow Analysis (DCF). A lower WACC indicates a lower cost of borrowing and higher efficiency in capital structure, while a higher WACC suggests higher risk or more expensive financing.
Example Calculation
Suppose a company has $600,000 in equity and $400,000 in debt. The cost of equity is 12%, the cost of debt is 6%, and the tax rate is 25%.
1. Total Capital (V) = $1,000,000
2. Weight of Equity (E/V) = 0.60
3. Weight of Debt (D/V) = 0.40
4. After-tax Cost of Debt = 6% × (1 – 0.25) = 4.5%
5. WACC = (0.60 × 12%) + (0.40 × 4.5%) = 7.2% + 1.8% = 9.0%