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WACC Calculator

Weighted Average Cost of Capital.

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WACC

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Overview

The Weighted Average Cost of Capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. It reflects the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital.

Symbols

Variables

WACC = WACC, E = Equity Value, D = Debt Value, R_e = Cost of Equity, R_d = Cost of Debt

WACC
Equity Value
$
Debt Value
$
Cost of Equity
Cost of Debt
Tax Rate

Apply it well

When To Use

When to use: WACC is primarily used in discounted cash flow (DCF) analysis to value companies or to evaluate the feasibility of internal projects. It is most appropriate when the project being evaluated has a risk profile similar to the company's existing operations and follows the firm's target capital structure.

Why it matters: It serves as the 'hurdle rate' for business decisions; if a project cannot generate a return higher than the WACC, it will likely destroy shareholder value. For investors, WACC is a critical tool for determining the discount rate used to find the present value of future cash flows.

Avoid these traps

Common Mistakes

  • Forgetting (1-t) for debt.
  • Using book values instead of market values.

One free problem

Practice Problem

A corporation has a market value of equity of 600,000 and a market value of debt of 400,000. If the cost of equity is 12%, the pre-tax cost of debt is 6%, and the corporate tax rate is 25%, calculate the WACC.

Equity Value600000 $
Debt Value400000 $
Cost of Equity0.12
Cost of Debt0.06
Tax Rate0.25

Solve for:

Hint: Calculate the total value V = E + D first, then apply the weights to the costs of capital.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen
  2. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe
  3. Wikipedia: Weighted average cost of capital
  4. Brealey, Myers, and Allen, Principles of Corporate Finance
  5. Ross, Westerfield, and Jaffe, Corporate Finance
  6. Brealey, Richard A., Myers, Stewart C., Allen, Franklin. Principles of Corporate Finance. McGraw-Hill Education.
  7. Berk, Jonathan, DeMarzo, Peter, Harford, Jarrad. Corporate Finance. Pearson.
  8. Standard curriculum — A-Level Finance