Cost Of Capital Calculator

WACC Formula:

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

Equity Weight (E/V):

dimensionless

Cost of Equity (Re):

Debt Weight (D/V):

dimensionless

Cost of Debt (Rd):

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 company'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 and valuation.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

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

Where:

\( E/V \) — Equity weight (proportion of equity in capital structure)
\( R_e \) — Cost of equity (%)
\( D/V \) — Debt weight (proportion of debt in capital structure)
\( R_d \) — Cost of debt (%)
\( T_c \) — Corporate tax rate (%)

Explanation: The formula calculates the weighted average of the cost of equity and the after-tax cost of debt, reflecting the proportional contribution of each financing source.

3. Importance of WACC Calculation

Details: WACC is crucial for capital budgeting decisions, company valuation, investment analysis, and determining the minimum acceptable return on investments. It serves as the discount rate in discounted cash flow (DCF) analysis.

4. Using the Calculator

Tips: Enter equity and debt weights as decimals (e.g., 0.6 for 60%), cost of equity and debt as percentages, and tax rate as a percentage. Ensure weights sum to 1 (100% of capital structure).

5. Frequently Asked Questions (FAQ)

Q1: What is a good WACC value?
A: Lower WACC is generally better, but acceptable ranges vary by industry. Typically ranges from 5-15%, with higher risk industries having higher WACC.

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

Q3: Why is debt cost adjusted for taxes?
A: Interest expense is tax-deductible, reducing the effective cost of debt, hence the (1 - Tc) multiplier.

Q4: What if equity and debt weights don't sum to 1?
A: The calculator assumes the inputs represent the complete capital structure. For accurate results, ensure E/V + D/V = 1.

Q5: How often should WACC be recalculated?
A: WACC should be updated regularly, especially when market conditions change, capital structure shifts, or tax rates are modified.