Cost Of Capital Formula Calculator

WACC Formula:

\[ WACC = (E/V \times Re) + (D/V \times Rd \times (1 - Tc)) \]

E/V (Equity Weight):

(0-1)

Re (Cost of Equity):

D/V (Debt Weight):

(0-1)

Rd (Cost of Debt):

Tc (Tax Rate):

WACC (Weighted Average Cost of Capital):

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1. What is the Cost of Capital Formula?

The Cost of Capital Formula, specifically the Weighted Average Cost of Capital (WACC), represents the average rate of return a company is expected to pay its security holders to finance its assets. It is a crucial metric in corporate finance for investment decisions and valuation.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

\[ WACC = (E/V \times Re) + (D/V \times Rd \times (1 - Tc)) \]

Where:

\( E/V \) — Equity weight (proportion of equity in capital structure)
\( Re \) — Cost of equity (%)
\( D/V \) — Debt weight (proportion of debt in capital structure)
\( Rd \) — Cost of debt (%)
\( Tc \) — Corporate tax rate (%)

Explanation: The formula calculates the weighted average of the costs of different sources of capital, with debt costs adjusted for tax benefits.

3. Importance of WACC Calculation

Details: WACC is used as a discount rate in discounted cash flow analysis, helps in capital budgeting decisions, serves as a benchmark for investment returns, and is crucial for company valuation and financial modeling.

4. Using the Calculator

Tips: Enter equity weight and debt weight as decimals between 0-1 (must sum to 1), cost of equity and debt as percentages, and tax rate as percentage. All values must be valid and logically consistent.

5. Frequently Asked Questions (FAQ)

Q1: Why is WACC important for companies?
A: WACC helps companies determine the minimum acceptable return on investments, evaluate project viability, and make optimal capital structure decisions.

Q2: What are typical WACC ranges?
A: WACC typically ranges from 5-15% depending on industry, company risk, and economic conditions. Higher risk companies have higher WACC.

Q3: How is cost of equity calculated?
A: Cost of equity is often 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: Why is debt cost adjusted for taxes?
A: Interest payments on debt are tax-deductible, reducing the effective cost of debt, hence the (1 - Tc) adjustment.

Q5: What if equity and debt weights don't sum to 1?
A: The weights should sum to 1 (100% of capital structure). If they don't, the calculation may not accurately reflect the company's true cost of capital.