Weighted Average Cost of Capital (WACC) Calculator

What is Weighted Average Cost of Capital (WACC)?

The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average cost a company pays for its capital across all sources, including both equity and debt. It's a crucial concept in corporate finance as it's used as the discount rate for future cash flows in discounted cash flow analysis and capital budgeting.

The WACC Formula

The formula for calculating WACC is:

\[WACC = (E/V \times R_e) + (D/V \times R_d \times (1-T_c))\]

Where:

• \(E\) = Market value of equity
• \(D\) = Market value of debt
• \(V\) = Total market value of financing (E + D)
• \(R_e\) = Cost of equity
• \(R_d\) = Cost of debt
• \(T_c\) = Corporate tax rate

Step-by-Step WACC Calculation

1. Determine the market values of equity (E) and debt (D).
2. Calculate the total market value of financing (V = E + D).
3. Determine the cost of equity (R_e) and cost of debt (R_d).
4. Identify the corporate tax rate (T_c).
5. Calculate the weights of equity (E/V) and debt (D/V).
6. Apply the WACC formula.

Example Calculation

Let's calculate the WACC for a company with the following information:

• Market value of equity (E) = $1,000,000
• Market value of debt (D) = $500,000
• Cost of equity (R_e) = 12%
• Cost of debt (R_d) = 6%
• Corporate tax rate (T_c) = 30%

1. Total market value: V = $1,000,000 + $500,000 = $1,500,000
2. Weight of equity: E/V = $1,000,000 / $1,500,000 = 0.6667
3. Weight of debt: D/V = $500,000 / $1,500,000 = 0.3333
4. WACC = (0.6667 × 12%) + (0.3333 × 6% × (1-30%))
5. WACC = 8% + 1.4% = 9.4%

Visual Representation

This pie chart illustrates the capital structure of the company in our example. The green slice represents equity financing (66.67%), and the blue slice represents debt financing (33.33%). The calculated WACC of 9.4% is shown in the center.