Expert in corporate finance, capital structure, and investment valuation.
The **Weighted Average Cost of Capital (WACC) Calculator** helps estimate a company’s minimum required return on investment. WACC is calculated by weighing the costs of debt and equity financing by their respective proportions in the capital structure. Use this calculator to solve for the WACC itself, or find the required Cost of Equity, Cost of Debt, Corporate Tax Rate, or Debt-to-Equity Ratio needed to hit a target WACC.
Weighted Average Cost of Capital Calculator
Weighted Average Cost of Capital (WACC) Formula
WACC is the weighted average of the costs of all sources of capital (Equity and Debt), adjusted for tax deductibility of interest:
$$WACC = \left( \frac{E}{V} \times R_e \right) + \left( \frac{D}{V} \times R_d \times (1 – T_c) \right)$$
Where $V = E + D$ (Total Value of Capital).
This calculator uses the Debt-to-Equity ratio ($D/E$) where $E/V = 1/(1+D/E)$ and $D/V = (D/E)/(1+D/E)$.
Formula Source: Investopedia – WACC Explained
Solving for the variables (assuming WACC is the calculated result or the target):
R_e (F) = [WACC - (W_d × R_d × (1 - T_c))] ÷ W_e
R_d (P) = [WACC - (W_e × R_e)] ÷ (W_d × (1 - T_c))
T_c (V) = 1 - [ (WACC - (W_e × R_e)) ÷ (W_d × R_d) ]
D/E (Q) — Solved algebraically for the required weights (W_e, W_d)
Variables Explained
- F (Cost of Equity – $R_e$): The return required by equity investors (e.g., from CAPM). Expressed as a percentage (e.g., 12 for 12%).
- P (Cost of Debt – $R_d$): The interest rate a company pays on its new debt (e.g., bond yield). Expressed as a percentage.
- V (Corporate Tax Rate – $T_c$): The marginal corporate tax rate used for the tax shield calculation. Expressed as a percentage.
- Q (Debt-to-Equity Ratio – $D/E$): The ratio of debt financing to equity financing. Entered as a decimal (e.g., 0.5).
Related Calculators
- CAPM Calculator (Cost of Equity)
- Net Present Value (NPV) Calculator
- Internal Rate of Return (IRR) Calculator
- Debt-to-Equity Ratio Calculator
What is WACC?
The **Weighted Average Cost of Capital (WACC)** represents the blended cost of financing a company’s assets. It is the average rate of return a company expects to pay to all its security holders (debt and equity) to finance its assets. WACC is critical because it is often used as the discount rate for evaluating new projects, serving as the hurdle rate that a project’s expected return must exceed to create value for the company.
The calculation is based on the proportion of debt and equity used in the company’s capital structure. Because interest payments on debt are tax-deductible, the cost of debt component is reduced by the corporate tax rate, creating a “tax shield.” The cost of equity, however, is not adjusted for taxes.
How to Calculate WACC (Example)
Scenario: $R_e$ = 12%, $R_d$ = 6%, $T_c$ = 21%, $D/E$ = 0.5 (meaning $D$ is 1 part, $E$ is 2 parts, $V=3$).
- Calculate Weights:
$$W_d = \frac{D/E}{1 + D/E} = \frac{0.5}{1.5} \approx 0.3333$$$$W_e = \frac{1}{1 + D/E} = \frac{1}{1.5} \approx 0.6667$$
- Calculate After-Tax Cost of Debt:
$$R_d(1-T_c) = 6\% \times (1 – 0.21) = 6\% \times 0.79 = 4.74\%$$
- Apply WACC Formula:
$$WACC = (W_e \times R_e) + (W_d \times R_d(1-T_c))$$
- Final Calculation:
$$WACC = (0.6667 \times 12\%) + (0.3333 \times 4.74\%) = 8.00\% + 1.58\% \approx \mathbf{9.58\%}$$
Frequently Asked Questions (FAQ)
Interest payments on corporate debt are typically tax-deductible expenses. This tax shield reduces the effective cost of debt to the company, making debt financing less expensive than equity financing on an after-tax basis.
What is the primary use of WACC?WACC is most commonly used as the discount rate when calculating the Net Present Value (NPV) of a company’s investment projects. It is the minimum rate of return a project must earn to be financially viable.
Does WACC change over time?Yes. WACC is a dynamic rate that changes with market conditions (affecting $R_e$ and $R_d$), corporate tax laws ($T_c$), and changes in the company’s capital structure (affecting $D/E$ weights).
What are the limitations of the WACC model?WACC assumes the new project has the same risk profile as the company’s existing operations and that the company maintains its current target capital structure. For projects with vastly different risk profiles, a project-specific discount rate should be used.