Cost Of Capital Formula List

WACC 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 (E):

USD

Total Value (V):

USD

Cost of Equity (Re):

Debt (D):

USD

Cost of Debt (Rd):

Tax Rate (Tc):

Weighted Average Cost of Capital (WACC):

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1. What is 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's used as a hurdle rate for investment decisions.

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:

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

Explanation: WACC blends the costs of equity and debt financing, weighted by their respective proportions in the company's capital structure, with debt costs adjusted for tax benefits.

3. Importance of WACC Calculation

Details: WACC is crucial for capital budgeting decisions, valuation analysis, and investment appraisal. It serves as the discount rate for calculating net present value (NPV) of future cash flows.

4. Using the Calculator

Tips: Enter all values in USD for monetary amounts and percentages for rates. Ensure total value (V) equals the sum of equity (E) and debt (D). Tax rate should be between 0-100%.

5. Frequently Asked Questions (FAQ)

Q1: Why is debt cost adjusted for taxes?
A: Interest expenses are tax-deductible, reducing the actual cost of debt to the company, hence the (1 - Tc) multiplier.

Q2: What is a good WACC value?
A: Lower WACC is generally better, but acceptable ranges vary by industry. Typically 5-15% for most companies, with higher rates for riskier businesses.

Q3: How to estimate cost of equity?
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.

Q4: Should I use book values or market values?
A: Market values are preferred as they reflect current investor expectations, though book values may be used when market data is unavailable.

Q5: What are WACC limitations?
A: Assumes constant capital structure, stable business risk, and may not be suitable for projects with different risk profiles than the company overall.