This online calculator makes it easy to calculate the Weighted Average Cost of Capital (WACC) for a company. The WACC is a measure of the overall cost of capital for a company and takes into account both debt and equity.
Using the WACC calculator
Our online Weighted Average Cost of Capital (WACC) calculator is a convenient tool to determine the cost of raising capital for any business. To use it, simply enter the cost of raising capital through equity, debt, and the corporate tax rate of the business.
The calculator will then compute the Weighted Average Cost of Capital, which is commonly used as a discount rate in Net Present Value (NPV) calculations and discounted cash flow analysis. This metric provides an estimate of the average cost of capital for a business, taking into account both equity and debt financing.
What is Weighted Average Cost of Capital?
In finance, the Weighted Average Cost of Capital (WACC) is the rate at which a company is expected to pay, on average, to all of its security holders when financing its assets. It is also referred to as the “cost of capital” and represents the minimum return that a company must earn on its assets to satisfy all of its stakeholders, including stockholders, creditors, owners, and other providers of capital.
When calculating WACC, one takes into account the different sources of capital raised by a company, such as common and preferred stock, straight, convertible or exchangeable debt, warrants, options, pension liabilities, subsidies, etc. Each of these securities is expected to result in different returns and WACC is useful because it takes into account all of these components and weighs them accordingly.
WACC is a widely used concept in financial management and investment management and is used to evaluate the profitability of an investment or project. It can also be used to determine the minimum rate of return that a company must earn on its assets to satisfy all of its stakeholders.
How to calculate WACC?
Calculating the Weighted Average Cost of Capital (WACC) involves estimating the cost of each component of capital, such as equity and debt, and taking into account the applicable tax rate. To start, one needs to know the proportion of capital that comes from equity or debt and the cost associated with each. For equity, this includes the cost of maintaining a share price that will satisfy investors. For debt, it is the rate paid on outstanding debt.
Once the necessary information is obtained, the WACC can be calculated using the appropriate formula or by using the WACC calculator provided. The WACC can then be used to compare a company’s returns to its cost of capital to determine how efficiently it utilizes its assets. For example, if a company’s yield is 22% and its WACC is 10%, it means the company is generating 11% more value for each dollar invested. On the other hand, if the yield is less than the WACC, the company is destroying value and losing capital.
There are different ways to write the formula for the Weighted Average Cost of Capital (WACC), here are two common forms:
(1) The generic form: WACC = (Σ(MVi * ri)) / (ΣMVi) Where: N = the number of sources of capital ri = the required rate of return for security i MVi = the market value of all outstanding securities i
(2) The equation for when the only sources of financing are equity and debt: WACC = (E / (E + D)) * Ke + (D / (E + D)) * Kd * (1 – Tc) Where: D = the total debt E = the total shareholder’s equity Kd = the cost of debt Ke = the equity cost Tc = the corporate tax rate
Both formulas calculate the weighted average cost of capital by taking into account the market value and required rate of return of different securities, and weighting them according to their relative importance in the capital structure. The second formula is simpler when the only sources of financing are equity and debt.