Weighted Cost of Capital Calculator

WACC Formula:

\[ WACC = (E/V) \times Re + (D/V) \times Rd \times (1 - Tc) \]

Market Value of Equity (E):

Market Value of Debt (D):

Cost of Equity (Re):

Cost of Debt (Rd):

Corporate Tax Rate (Tc):

Weighted Average Cost of Capital (WACC):

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1. What is Weighted Average Cost of Capital?

The Weighted Average Cost of Capital (WACC) represents a firm's average after-tax cost of capital from all sources including common stock, preferred stock, bonds, and other forms of debt. It's used as a hurdle rate for investment decisions.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

\[ WACC = \left(\frac{E}{V}\right) \times Re + \left(\frac{D}{V}\right) \times Rd \times (1 - Tc) \]

Where:

\( E \) — 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

Explanation: The formula weights the cost of each capital component by its proportional value in the company's capital structure.

3. Importance of WACC Calculation

Details: WACC is crucial for making investment decisions, valuing companies, and determining economic value added (EVA). It represents the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other capital providers.

4. Using the Calculator

Tips: Enter all values in consistent currency units. Cost of equity and debt should be entered as percentages (e.g., 8.5 for 8.5%). Tax rate should also be entered as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What's a good WACC?
A: There's no universal "good" WACC. It varies by industry and company risk. Typically ranges from 5-15% for most companies.

Q2: How is cost of equity determined?
A: Often calculated using CAPM: Re = Rf + β(Rm - Rf), where Rf is risk-free rate, β is beta, and Rm is expected market return.

Q3: Should I use book or market values?
A: Always use market values for WACC calculation as they reflect current costs of capital.

Q4: What if a company has preferred stock?
A: The formula expands to include preferred stock component: WACC = (E/V)×Re + (D/V)×Rd×(1-Tc) + (P/V)×Rp.

Q5: How often should WACC be recalculated?
A: At least annually, or whenever there are significant changes in capital structure, interest rates, or risk profile.