Investment specialist and expert in capital budgeting, company valuation, and cost of capital determination.
The **Weighted Average Cost of Capital (WACC) Calculator** determines a company’s blended cost of financing, essential for investment decisions like NPV and IRR analysis. Enter values for any three of the four core metrics to solve for the missing one.
Weighted Average Cost of Capital Calculator
Instructions: Enter values for any three of the four core parameters to solve for the missing one.
WACC Metrics (Rates as Decimals/Ratios)
Auxiliary Inputs (Required for calculation)
Weighted Average Cost of Capital Formula
The WACC is calculated using the weights and costs of all capital sources:
$$WACC = (W_e \times R_e) + [W_d \times R_d \times (1 – T)]$$Where $W_d = (1 – W_e)$ is the weight of debt.
Formula Source: InvestopediaVariables Explained (Q, F, P, V – Parameters)
- $R_e$ (Cost of Equity, $Q$): The return required by shareholders, typically estimated using CAPM.
- $R_d$ (Cost of Debt, $F$): The effective interest rate a company pays on its debt.
- $W_e$ (Weight of Equity, $P$): The proportion of the company’s financing that comes from equity (as a decimal).
- $W_d$ (Weight of Debt): The proportion of financing from debt ($1 – W_e$).
- $T$ (Corporate Tax Rate): The company’s effective tax rate (required because interest payments are tax-deductible).
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What is the Weighted Average Cost of Capital (WACC)?
The **WACC** is a critical financial metric that represents the minimum rate of return a company must earn on its existing asset base to satisfy its creditors and shareholders. It is the average cost of raising all capital (debt and equity), with each source weighted by its proportional use in the capital structure. WACC is typically used as the discount rate when calculating the Net Present Value (NPV) of a project or company.
Because interest payments on debt are tax-deductible, the cost of debt is calculated net of tax, often making debt cheaper than equity. The WACC formula reflects this tax advantage, which is why accurate weightings and tax rates are essential for precise calculation.
How to Calculate WACC (Example)
Assume a company has the following data:
- Cost of Equity ($R_e$) = 12% (0.12)
- Cost of Debt ($R_d$) = 5% (0.05)
- Weight of Equity ($W_e$) = 70% (0.70)
- Corporate Tax Rate ($T$) = 21% (0.21)
We solve for WACC:
- Step 1: Determine the Weight of Debt ($W_d$)
$$W_d = 1 – W_e = 1 – 0.70 = \mathbf{0.30}$$
- Step 2: Calculate the Cost of Debt (After-Tax)
$$R_d(1-T) = 0.05 \times (1 – 0.21) = 0.05 \times 0.79 = \mathbf{0.0395}$$
- Step 3: Apply the WACC Formula
$$WACC = (W_e \times R_e) + (W_d \times R_d(1-T))$$
$$WACC = (0.70 \times 0.12) + (0.30 \times 0.0395) = 0.084 + 0.01185 = \mathbf{0.09585}$$
The WACC is $\mathbf{0.09585}$ or $\mathbf{9.585\%}$.
Frequently Asked Questions (FAQ)
WACC is calculated after tax because interest payments on debt are generally tax-deductible expenses for the company. This creates a “tax shield” that effectively lowers the net cost of debt financing, which must be reflected in the WACC calculation.
Generally, yes. A lower WACC means the company can finance projects at a lower average cost. This results in more projects clearing the minimum hurdle rate (WACC), thus increasing the total Net Present Value (NPV) and potentially enhancing shareholder value.
A major limitation is that WACC assumes the company maintains its current capital structure and risk profile over the life of the project. It may not be suitable as a discount rate for projects with risk profiles significantly different from the company’s average.
The Cost of Equity is the return a company theoretically pays to its common stock investors. It is often estimated using the Capital Asset Pricing Model (CAPM), which considers the risk-free rate, the stock’s beta, and the market risk premium.