Cost Of Capital All Formulas

WACC Formula:

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

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):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Weighted Average Cost of Capital (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 used as a hurdle rate for investment decisions and valuation analysis.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

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

Where:

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

Cost of Equity (CAPM): \( R_e = R_f + \beta \times (R_m - R_f) \)

Cost of Debt: \( R_d = YTM \times (1 - T_c) \)

3. Importance of WACC Calculation

Details: WACC is crucial for capital budgeting decisions, company valuation using discounted cash flow analysis, and determining the minimum acceptable return on investment projects. It reflects the risk of the company's operations and capital structure.

4. Using the Calculator

Tips: Enter market values in dollars, costs as percentages, and tax rate as a percentage. Use current market values rather than book values for accurate calculations. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: Why use market values instead of book values?
A: Market values reflect current investor expectations and risk perceptions, while book values are historical and may not represent true economic value.

Q2: How is cost of equity calculated?
A: Typically using the Capital Asset Pricing Model (CAPM): Re = Rf + β(Rm - Rf), where Rf is risk-free rate, β is beta coefficient, and Rm is market return.

Q3: What is a good WACC value?
A: There's no universal "good" WACC - it varies by industry, company risk, and economic conditions. Lower WACC generally indicates lower risk and cheaper financing.

Q4: How often should WACC be recalculated?
A: WACC should be updated regularly as market conditions, interest rates, and company risk profile change - typically quarterly or when major market shifts occur.

Q5: Can WACC be negative?
A: In theory yes, but practically very rare. It could occur with extremely high cash balances earning negative real returns in high-inflation environments.