How To Calculate Cost Of Capital

WACC Calculator

WACC Formula:

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

Market Value of Equity (E):

USD

Total Market Value (V):

USD

Cost of Equity (Re):

Market Value of Debt (D):

USD

Cost of Debt (Rd):

Corporate 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 and company 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:

\( E \) — 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: The formula weights the cost of each capital source by its proportion in the company's capital structure, with debt costs adjusted for tax benefits.

3. Importance of WACC Calculation

Details: WACC is crucial for investment appraisal, capital budgeting decisions, company valuation in mergers and acquisitions, and assessing financial performance. It serves as the discount rate in discounted cash flow analysis.

4. Using the Calculator

Tips: Enter all values in USD and percentages. Ensure V = E + D. Market values (not book values) should be used for accurate calculation. Tax rate should be entered as a percentage (e.g., 21 for 21%).

5. Frequently Asked Questions (FAQ)

Q1: Why use market values instead of book values?
A: Market values reflect current investor expectations and the true cost of capital, while book values are historical and may not represent current market conditions.

Q2: How is cost of equity calculated?
A: Typically 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: What is a good WACC?
A: Lower WACC is generally better, but it varies by industry. Typically ranges from 5-15%. Compare against industry averages and company's historical WACC.

Q4: Why is debt cost tax-adjusted?
A: Interest expenses are tax-deductible, reducing the actual cost of debt to the company by the tax savings.

Q5: When should WACC be recalculated?
A: When capital structure changes significantly, interest rates change substantially, or company risk profile alters meaningfully.