WACC Calculator

1. Using the WACC calculator
2. How to calculate Weighted Average Cost of Capital
3. WACC formula
4. What is WACC
5. Financial caution

    Using the WACC calculator

Our online Weighted Average Cost of Capital calculator helps you easily calculate the cost of raising capital for any business. To do it, enter the amount of equity capital and amount of debt (their market value), and their associated costs as a percentage of the capital raised (cost of equity and cost of debt). Finally, enter the corporate tax the business operates under. This last step is optional, but would give you a more usable result.

The calculator will then output the Weighted Average Cost of Capital as a percentage of the total capital raised. WACC is often used as a discount rate for NPV calculations and discounted cash flow analyses.

    How to calculate Weighted Average Cost of Capital

So, how does one calculate weighted average cost of capital? For a simple calculation of this weighted mean one needs to know the different components of the cost of capital such as how much of it comes from equity or debt. Furthermore, the cost of each needs to be estimated.

For debt the estimation is straightforward as the cost of debt is the interest rate paid on outstanding debt plus any fixed costs associated with obtaining the loan or issuing the debt security. Isolating the cost of equity is a little harder" ^[2] since just asking equity investors how much return they would like will not yield applicable results. It typically includes using the Capital Asset Pricing Model (CAPM) and estimating the beta of the stock price relative to an appropriate market index (a.k.a. the "risk premium"). This is one way to estimate how much should be spent in order to maintain a share price that will satisfy investors. Finally, the applicable tax rate should be known from financial statements.

Once the above estimations are made, use an appropriate formula from the ones below or simply plug in the numbers in the WACC calculator above. After WACC is calculated, it can be used to compare a company's yields versus weighted average cost of capital to get an idea of how well it utilizes its capital assets^[2].

    WACC formula

There are several ways to write the formula for weighted average cost of capital. Equation (1) below is the generic form wherein N is the number of sources of capital, r_i is the required rate of return for security i and MV_i is the market value of all outstanding securities i. (2) is the equation you can use if the only sources of financing are equity and debt with D being the total debt, E is the total shareholder's equity, r_d is the cost of debt and r_e is the equity cost.

Formula (3)^[1][2] is the one used in this WACC formula calculator since it incorporates tax effects as well with t being the tax rate. Since there are many possible proxies for each element in the cost of capital formula there might be a fairly large range of defensible WACC analyses as result.

    What is WACC

In finance, the Weighted Average Cost of Capital (WACC) is defined as the rate a company expects to pay, on average, to all its security holders when financing its assets. It is "the weighted average of the costs of equity and debt"^[1] and reflects a firm's cost of capital acquisition as well as its capital structure.

The WACC of a company represents the minimum return it must earn on its assets to satisfy all its stockholders, creditors, owners, and other capital providers, lest they flee. For example, let us say the company yield returns 22% and WACC is 10%. This means that the company is yielding 11% on every dollar it invests. The firm is creating 11 cents of value for each dollar of capital. If the yield is less than WACC, the business is destroying value and losing capital.

In calculating it one takes into account the different sources of capital raised. These can include:

• common stock
• preferred stock
• debt (straight, convertible or exchangeable)
• warrants and options
• pension liabilities
• subsidies

Other options are also possible. Different securities are expected to result in different returns and WACC is useful since it weighs all capital components. The concept thus sees widespread use in financial management and investment management.

    Financial caution

This is a simple online tool which is a good starting point in estimating the average cost of a capital raise, but is by no means the end of such a process. You should always consult a qualified professional when making important financial decisions and long-term agreements, such as long-term bank deposits. Use the information provided by the weighted average cost of capital calculator critically and at your own risk.