WACC Calculator

Weighted Average Cost of Capital

Calculate the weighted average cost of capital (WACC) for investment analysis and corporate finance decisions.

Example Calculations

Common WACC scenarios for different types of companies

Tech Startup

Tech Startup

High-growth technology startup with limited debt

Equity Value: $10,000,000.00

Debt Value: $2,000,000.00

Cost of Equity: 15%

Cost of Debt: 8%

Tax Rate: 21%

Mature Corporation

Mature Corporation

Established company with balanced capital structure

Equity Value: $50,000,000.00

Debt Value: $30,000,000.00

Cost of Equity: 12%

Cost of Debt: 6%

Tax Rate: 25%

Highly Leveraged Company

Highly Leveraged Company

Company with significant debt financing

Equity Value: $20,000,000.00

Debt Value: $80,000,000.00

Cost of Equity: 18%

Cost of Debt: 10%

Tax Rate: 21%

Conservative Company

Conservative Company

Low-debt company with stable operations

Equity Value: $75,000,000.00

Debt Value: $10,000,000.00

Cost of Equity: 10%

Cost of Debt: 5%

Tax Rate: 25%

Other Titles
Understanding WACC: A Comprehensive Guide
Learn how to calculate and interpret the Weighted Average Cost of Capital for investment decisions

What is WACC?

  • Definition and Purpose
  • Importance in Finance
  • Key Components
The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average rate of return a company must earn on its existing assets to satisfy its creditors, owners, and other capital providers. It is calculated by taking the weighted average of the cost of equity and the after-tax cost of debt.
WACC Formula
WACC = (E/V × Re) + (D/V × Rd × (1-T))
Where: E = Market value of equity, D = Market value of debt, V = Total value (E + D), Re = Cost of equity, Rd = Cost of debt, T = Corporate tax rate
Why WACC Matters
WACC serves as a crucial benchmark for investment decisions. It represents the minimum return that a company must earn on its investments to create value for shareholders. Projects with returns above WACC add value, while those below WACC destroy value.

Real-World Applications

  • A company with WACC of 10% should only invest in projects returning more than 10%
  • WACC is used as the discount rate in discounted cash flow (DCF) valuation models
  • Companies use WACC to evaluate mergers, acquisitions, and capital budgeting decisions

Step-by-Step Guide to Using the WACC Calculator

  • Input Requirements
  • Calculation Process
  • Result Interpretation
Step 1: Gather Financial Data
Collect the necessary financial information: market value of equity, market value of debt, cost of equity, cost of debt, and corporate tax rate. Ensure all values are current and accurate.
Step 2: Enter Values
Input the financial data into the calculator fields. The equity and debt values should be in dollars, while the cost percentages should be entered as whole numbers (e.g., 12 for 12%).
Step 3: Review Results
The calculator will display the WACC percentage, equity and debt weights, after-tax cost of debt, and total company value. Use these results for investment analysis and decision-making.

Calculation Example

  • For a company with $50M equity, $30M debt, 12% cost of equity, 6% cost of debt, and 25% tax rate
  • WACC = (50/80 × 12%) + (30/80 × 6% × (1-0.25)) = 7.5% + 1.69% = 9.19%
  • This means the company needs to earn at least 9.19% on investments to create value

Real-World Applications of WACC

  • Investment Analysis
  • Corporate Finance
  • Valuation Methods
Capital Budgeting
WACC is used as the discount rate in net present value (NPV) calculations for capital budgeting decisions. Projects with positive NPV when discounted at WACC are typically accepted.
Business Valuation
In discounted cash flow (DCF) valuation, WACC serves as the discount rate to determine the present value of future cash flows and estimate company value.
Mergers and Acquisitions
WACC helps evaluate the financial feasibility of mergers and acquisitions by determining the minimum required return on investment.

Industry Applications

  • A manufacturing company uses WACC to evaluate new equipment purchases
  • Investment banks use WACC in company valuations for M&A transactions
  • Private equity firms use WACC to assess potential investment opportunities

Common Misconceptions and Correct Methods

  • Calculation Errors
  • Interpretation Mistakes
  • Best Practices
Using Book Values Instead of Market Values
A common mistake is using book values for equity and debt instead of market values. WACC should reflect current market conditions, not historical accounting values.
Ignoring Tax Benefits of Debt
The cost of debt should be calculated after taxes since interest payments are tax-deductible. This tax shield reduces the effective cost of debt financing.
Overlooking Capital Structure Changes
WACC should be recalculated when significant changes occur in the company's capital structure, as this affects the weights of equity and debt.

Correct Calculation Methods

  • Market value of equity = Current stock price × Number of shares outstanding
  • After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate)
  • WACC should be updated quarterly or when major financing events occur

Mathematical Derivation and Examples

  • Formula Derivation
  • Component Analysis
  • Sensitivity Analysis
WACC Formula Derivation
The WACC formula combines the cost of equity and after-tax cost of debt, weighted by their respective proportions in the capital structure. This reflects the blended cost of all capital sources.
Component Analysis
Each component of WACC can be analyzed separately: cost of equity (using CAPM or dividend discount model), cost of debt (current market rates), and capital structure weights (market values).
Sensitivity to Changes
WACC is sensitive to changes in interest rates, market conditions, company risk profile, and capital structure. Small changes in inputs can significantly impact the calculated WACC.

Mathematical Examples

  • If cost of equity increases from 12% to 15%, WACC increases proportionally
  • Higher debt levels typically increase WACC due to increased financial risk
  • Lower tax rates reduce the tax shield benefit and increase WACC