Wacc Calculator

WACC Formula:

\[ WACC = \left(\frac{E}{V} \times R_e\right) + \left(\frac{D}{V} \times R_d \times (1 - T)\right) \]

Equity (E):

Total Value (V):

Cost of Equity (Re):

decimal

Debt (D):

Cost of Debt (Rd):

decimal

Tax Rate (T):

decimal

Weighted Average Cost of Capital (WACC):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is the WACC Formula?

The WACC (Weighted Average Cost of Capital) formula calculates the average rate of return a company is expected to pay to all its security holders to finance its assets. It represents the minimum return that a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

\[ WACC = \left(\frac{E}{V} \times R_e\right) + \left(\frac{D}{V} \times R_d \times (1 - T)\right) \]

Where:

\( E \) — Market value of equity
\( V \) — Total market value of equity and debt
\( R_e \) — Cost of equity
\( D \) — Market value of debt
\( R_d \) — Cost of debt
\( T \) — Corporate tax rate

Explanation: The formula weights the cost of each capital source (equity and debt) by its respective proportion in the company's capital structure, with debt cost adjusted for tax benefits.

3. Importance of WACC Calculation

Details: WACC is crucial for investment decisions, capital budgeting, and company valuation. It serves as the discount rate for future cash flows in discounted cash flow (DCF) analysis and helps determine the feasibility of potential investments.

4. Using the Calculator

Tips: Enter all values in appropriate units (dollars for monetary values, decimals for rates). Ensure that E + D = V for accurate results. All values must be positive and valid.

5. Frequently Asked Questions (FAQ)

Q1: Why is debt cost adjusted for taxes?
A: Interest payments on debt are tax-deductible, reducing the effective cost of debt for the company.

Q2: What is a good WACC value?
A: A lower WACC is generally better as it indicates cheaper financing costs. The "goodness" depends on industry standards and company-specific factors.

Q3: How do I calculate cost of equity?
A: Cost of equity is typically calculated using CAPM (Capital Asset Pricing Model): Re = Rf + β × (Rm - Rf), where Rf is risk-free rate, β is beta, and Rm is market return.

Q4: Should I use book values or market values?
A: Market values are preferred as they reflect current investor expectations, though book values may be used when market values are unavailable.

Q5: What are the limitations of WACC?
A: WACC assumes constant capital structure, stable business risk, and that new investments have the same risk as existing operations.