WACC Calculator
Calculate Weighted Average Cost of Capital
What is WACC?
The Weighted Average Cost of Capital (WACC) is a financial metric that calculates the average rate a company expects to pay to finance its assets.
It represents the blended cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt.
Think of this as a “blended smoothie” of money.
Imagine you are funding a new project. You borrow some money from a bank (Debt) and get the rest from investors (Equity). The bank charges you interest, and the investors expect a certain return on their investment. Because you likely didn’t take equal amounts from both, you can’t just average the two rates. You have to weight them based on how much of the total “smoothie” they make up.
WACC tells you exactly how much it costs, on average, to hold every dollar of capital in your business.
The Science Behind WACC
WACC acts as the “Hurdle Rate” for corporate finance.
It is the minimum return a company must earn on an existing asset base to satisfy its creditors, owners, and other capital providers.
If a company’s Return on Invested Capital (ROIC) is less than its WACC, the company is destroying value. If the ROIC is higher than WACC, it is creating value.
WACC Formula
While the concept is complex, the core calculation relies on a specific formula that balances equity and debt while accounting for the tax benefits of interest payments.
WACC = (E/V × Re) + [(D/V × Rd) × (1 - T)]
Where:
- E = Market value of the firm’s equity (Market Cap)
- D = Market value of the firm’s debt
- V = Total value of capital (E + D)
- Re = Cost of Equity (Required return for investors)
- Rd = Cost of Debt (Interest rate on bonds/loans)
- T = Corporate Tax Rate
Why the tax adjustment?
Notice the (1 – T) next to the debt portion? Interest payments on debt are generally tax-deductible, which effectively makes debt financing cheaper than equity financing. The formula accounts for this “tax shield.”
How to Use This WACC Calculator
We have designed this calculator to simplify the weighting process. You do not need to calculate the ratios manually; simply input your raw data, and the tool handles the math.
- Enter Capital Structure (Market Value):
- Equity Value (E): Enter the total market capitalization of the company (Share Price × Shares Outstanding). For private companies, use an estimated valuation.
- Debt Value (D): Enter the total market value of the company’s debt (bonds, loans, etc.).
- Enter Cost of Capital:
- Cost of Equity (Re): This is the return shareholders expect. This is typically calculated using the CAPM model (Risk-Free Rate + Beta × Market Risk Premium).
- Cost of Debt (Rd): This is the effective interest rate the company pays on its current debt.
- Enter Tax Details:
- Corporate Tax Rate: Enter the company’s effective tax rate (e.g., 21% for standard US corporations).
Once you enter these figures, the calculator will instantly provide your WACC percentage and a visual breakdown of your capital structure.
Interpreting Your Results
Once you have your WACC percentage, what does it actually tell you?
1. The Lower, The Better (Usually)
A lower WACC indicates a cheaper cost of funding, which makes it easier for the company to turn a profit on new projects.
- Low WACC: Suggests the company is seen as a safe investment or has utilized cheap debt efficiently.
- High WACC: Suggests the company is perceived as risky (investors demand high returns) or relies too heavily on expensive equity.
2. Industry Benchmarks Matter
A “good” WACC is entirely dependent on the industry.
- Utility Companies: Often have a low WACC (e.g., 4-6%) because they have stable cash flows and can carry a lot of cheap debt.
- Technology Startups: Often have a high WACC (e.g., 10-15%+) because they are high-risk and rely on expensive equity financing rather than bank loans.
3. Investment Decisions
Use the WACC as your baseline for evaluating new projects.
- If a new factory is projected to return 12% and your WACC is 8%, the project is viable.
- If the project returns 7% and your WACC is 8%, the project will destroy shareholder value, even if it is technically profitable.
Limitations of WACC
While WACC is a fundamental tool in finance, it is not without flaws. Keep these constraints in mind:
- Market Volatility: WACC assumes market values for debt and equity. In reality, stock prices fluctuate daily, meaning a company’s WACC is a moving target, not a static number.
- Estimation of Equity Cost: The “Cost of Equity” is theoretical. Unlike debt, where you have a set interest rate, the cost of equity is based on models (like CAPM) that rely on assumptions about future risk and market premiums.
- Private Company Difficulty: Calculating WACC for private companies is difficult because there is no public “Market Value” for their equity/stock. Users often have to use comparable public company data to estimate inputs.
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