Weighted Average Cost of Capital Calculator (WACC Calculator)

Calculate the average cost to all investors and creditors to identify your companies WACC (Weighted Average Cost of Capital) using the WACC Calculator.

Weighted Average Cost of Capital Calculator

Weighted Average Cost of Capital Calculator
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Weighted Average Cost of Capital (WACC):11.725
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Weighted Average Cost of Capital (WACC): A Measure to Evaluate Your Potential Investments

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Every business runs on investments and evaluating your potential investments is very important. WACC is an excellent financial measurement that help a firm's management identify whether the investment in a new project will be profitable. WACC is basically a calculation of a firm's cost of capital. Increase in WACC denotes decreases in valuation and increase in risk.

How to use the WACC calculator

The WACC calculator created by iCalculator performs the complex calculations involved in calculation WACC with the simplicity of just a few inputs and clicks. Enter the following details into the calculator to calculate WACC for your investment:

  • Total Debt: Market value of a firm's Debt.
  • Total Equity: Market value of a firm's equity payment.
  • Cost of Debt: Yield to maturity on existing debt.
  • Cost of Equity: Required rate of return.
  • Corporate Tax Rate: The prevailing corporate tax rate.

On the basis of your inputs the calculator will provide you with the WACC of your company.

Benefits of using the WACC calculator

You can benefit from using the WACC calculator in many ways:

  • If you are a potential investor, you may use WACC as one of the methods to predict the returns on your investments.
  • It can be used by the management of firm to decide if the company should invest in new projects.
  • The calculator is online, and easy to use with clear instructions. It helps you do the complex WACC calculations easily and saves you a lot of time and trouble.

How to calculate WACC

All sources of capital, including common stock, preferred stock, bonds and all other long term debts, are included in a WACC calculation. WACC is calculated by applying the following formula:

WACC = (E / V) × Re + (D / V) × Rd × (1 − Tc)

Where:

  • Re = Cost of equity
  • Rd = Cost of debt
  • E = Market value of the firm's equity
  • D = Market value of the firm's debt
  • V = E + D = Total market value of the firm's financing
  • E/V = Percentage of financing that is equity
  • D/V = Percentage of financing that is debt
  • Tc = Corporate tax rate

What is the cost of debt and cost of equity?

Debt and equity are the two components that constitute a company's capital funding. The methods to determine the cost of debt and equity are different. Let's take a look:

Cost of debt (Rd): Calculation of cost of debt is a simple process. It's calculated by using the market rate that a company is paying on its debt. If a firm is paying a rate other than market rate, it can be replaced by the estimated appropriate market rate.

The net cost of a company's debt is used for the calculation. It's the total cost of debt minus the tax deductions. This is because the tax deductions are available on interest paid that are generally company's benefit.

Cost of Equity

Calculating the cost of equity (Re) is rather tricky. Equity does not have any fixed price, but this does not mean that there is no cost of equity. Shareholders of the company will expect to receive a certain amount of return on their investments. If the company fails to pay the returns, the investors will simply sell off their shares and that will decrease the value of the stock. The cost of equity can be defined as the amount a firm spends to maintain the value of its stock that satisfies its investors.

Who uses WACC?

The WACC method is used by:

  1. Companies for making investment decisions by evaluating their projects. These projects may have the same risk levels as existing projects or different risk levels.
  2. Potential investors use WACC for valuing a company's stock in which they are interested to invest.
  3. WACC is used as a discount rate in net present value calculations. This method is also used to evaluate the projects for profitability of investment.

The limitations of using WACC

Calculating WACC is not as simple as it seems. It becomes challenging when it comes to certain elements such as cost of equity that are not consistent values. Different businesses may report this figure differently for various reasons. Even though WACC could be a valuable method to assess potential returns on the investments, this should always be used along with other available metrics.

Conclusion

WACC is an important metric used for different financial purposes, but it must be used very carefully. The components should be expressed in the market value. Faulty inputs result in a faulty WACC value that can ultimately lead to ill-informed investment decisions. A company should often reassess its WACC in order to make efficient investment decisions and benchmark success as well as refining forecasting models via robust data analysis.