# WACC calculator

The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average cost of financing a company’s assets, considering both debt and equity components.

Page written by Ian Hawkins. Last reviewed on June 24, 2024. Next review due October 1, 2025.

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Weighted average cost of capital

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## Definitions

• Cost of equity: The cost of equity is the percentage the investors expect to earn from their investment in a company’s shares. It’s the return they demand for taking on the risk of investing in the company.
• Total equity: Total equity is the value of the shareholders’ ownership in the company. It’s calculated by subtracting total liabilities from total assets and includes common stock, retained earnings, and additional paid-in capital.
• Cost of debt: The cost of debt is the interest rate a company pays on its borrowed money, adjusted for the tax benefits of interest payments. It’s the effective rate paid on debt.
• Total debt: Total debt is the sum of all short-term and long-term liabilities a company owes. This includes loans, bonds, and other debts that need to be repaid.
• Corporate tax rate: The corporate tax rate is the percentage of a company’s profits paid to the government in taxes. It impacts the cost of debt since interest payments are tax-deductible, lowering the overall cost.

## What is WACC?

The weighted average cost of capital (WACC) is the average rate of return a company is expected to pay its investors (both equity and debt holders) for using their capital. It represents the company’s cost of financing and is a crucial metric for evaluating investment opportunities and overall financial health.

## What is WACC used for?

• Investment appraisal: Companies use WACC to evaluate the feasibility of new projects. It serves as a hurdle rate; if the expected return on an investment exceeds the WACC, the project is considered worthwhile.

• Valuation: WACC is used in discounted cash flow (DCF) analysis to calculate the present value of future cash flows. This helps in determining the fair value of a company or its assets.

• Performance Measurement: WACC helps in assessing whether a company is generating value for its shareholders. If a company’s return on invested capital (ROIC) is higher than its WACC, it is creating value.

• Capital Structure Decisions: It aids in deciding the optimal mix of debt and equity financing. Companies aim to lower their WACC by adjusting their capital structure, thereby maximizing shareholder value.

• Risk assessment: Investors use WACC to gauge the risk of investing in a company. A lower WACC typically indicates a lower risk investment.

## How to calculate WACC

To calculate the weighted average cost of capital:

1. Determine the market value of equity (E) and the market value of debt (D). Add these two values to find the total value of the firm (V).
(V) = (E) + (D)
2. Determine the cost of equity (Re) and the cost of debt (Rd). These are the required rates of return on equity and debt, respectively.
– Cost of Equity (Re): The required rate of return on equity.
– Cost of Debt (Rd): The required rate of return on debt.
3. Find the corporate tax rate (Tc) applicable to the company.
– Corporate Tax Rate (Tc): The percentage of the company’s earnings paid to the government as tax.
4. Plug the values into the formula to calculate the WACC.
WACC = [E/V x Re] + [D/V x Rd x (1-Tc)]