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.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

Where:

• \( w_e \) — Weight of equity in capital structure
• \( r_e \) — Cost of equity (%)
• \( w_d \) — Weight of debt in capital structure
• \( r_d \) — Cost of debt (%)
• \( t \) — Corporate tax rate (%)

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

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.

4. Using the Calculator

Tips: Enter weights as decimals (must sum to 1), costs as percentages, and tax rate as percentage. All values must be non-negative and weights should be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: Why is debt cost adjusted for taxes?
A: Interest expenses are tax-deductible, reducing the effective cost of debt for companies.

Q2: What is a good WACC value?
A: Lower WACC is generally better, but acceptable ranges vary by industry. Typically ranges from 5% to 15% for most companies.

Q3: How do I calculate cost of equity?
A: Common methods include Capital Asset Pricing Model (CAPM) or Dividend Discount Model (DDM).

Q4: Should weights be based on market or book values?
A: Market values are preferred as they reflect current investor expectations and market conditions.

Q5: What if my company has preferred stock?
A: Add a third component: \( w_p \times r_p \) where \( w_p \) is weight of preferred stock and \( r_p \) is cost of preferred stock.