WACC Calculator
This calculator computes the Weighted Average Cost of Capital (WACC), which represents a company's average cost of financing from both debt and equity sources.
Input Financial Data
Understanding WACC
What is WACC?
The Weighted Average Cost of Capital (WACC) represents a company's blended cost of capital from all sources, including equity and debt. It reflects the minimum return a company must earn to satisfy its investors and creditors.
WACC Formula
WACC = (E/V × Re) + (D/V × Rd × (1 - T))
Where:
- E = Market value of equity
- D = Market value of debt
- V = E + D (Total capital)
- Re = Cost of equity
- Rd = Cost of debt
- T = Corporate tax rate
Key Components
- Cost of Equity (Re): Typically estimated using CAPM (Capital Asset Pricing Model)
- Cost of Debt (Rd): The effective interest rate on the company's debt
- Tax Shield: The (1 - T) factor accounts for interest tax deductibility
- Market Values: Uses current market values rather than book values
WACC Calculation Examples
Click on an example to see the step-by-step calculation:
Example 1: Basic WACC Calculation
Scenario: Calculate WACC for a company with the following parameters.
1. Known Values:
- Cost of Equity (Re) = 12%
- Cost of Debt (Rd) = 6%
- Tax Rate (T) = 25%
- Market Value of Equity (E) = $800,000
- Market Value of Debt (D) = $200,000
2. Calculate Weights:
Total Capital (V) = E + D = $800,000 + $200,000 = $1,000,000
Weight of Equity = E/V = $800,000/$1,000,000 = 0.8 (80%)
Weight of Debt = D/V = $200,000/$1,000,000 = 0.2 (20%)
3. After-Tax Cost of Debt:
Rd × (1 - T) = 6% × (1 - 0.25) = 4.5%
4. Calculate WACC:
WACC = (0.8 × 12%) + (0.2 × 4.5%) = 9.6% + 0.9% = 10.5%
Conclusion: The company's WACC is 10.5%.
Example 2: Higher Debt Proportion
Scenario: Company with more debt in capital structure.
1. Known Values:
- Re = 15%
- Rd = 8%
- T = 30%
- E = $500,000
- D = $500,000
2. Calculate Weights:
V = $500,000 + $500,000 = $1,000,000
E/V = 0.5 (50%), D/V = 0.5 (50%)
3. After-Tax Cost of Debt:
8% × (1 - 0.30) = 5.6%
4. Calculate WACC:
WACC = (0.5 × 15%) + (0.5 × 5.6%) = 7.5% + 2.8% = 10.3%
Conclusion: Higher debt lowers WACC due to tax shield.
Example 3: Startup with No Debt
Scenario: Early-stage company financed entirely by equity.
1. Known Values:
- Re = 20%
- Rd = N/A
- T = 20%
- E = $1,000,000
- D = $0
2. Calculate Weights:
V = $1,000,000
E/V = 1 (100%), D/V = 0 (0%)
3. WACC Calculation:
WACC = (1 × 20%) + (0 × Rd) = 20%
Conclusion: For all-equity firms, WACC equals cost of equity.
Example 4: Large Corporation
Scenario: Established company with diverse capital structure.
1. Known Values:
- Re = 8.5%
- Rd = 4.2%
- T = 35%
- E = $10,000,000
- D = $4,000,000
2. Calculate Weights:
V = $10,000,000 + $4,000,000 = $14,000,000
E/V ≈ 0.714 (71.4%), D/V ≈ 0.286 (28.6%)
3. After-Tax Cost of Debt:
4.2% × (1 - 0.35) ≈ 2.73%
4. Calculate WACC:
WACC = (0.714 × 8.5%) + (0.286 × 2.73%) ≈ 6.07% + 0.78% ≈ 6.85%
Conclusion: Large firms often have lower WACC due to scale.
Example 5: High-Risk Business
Scenario: Volatile industry with high costs of capital.
1. Known Values:
- Re = 25%
- Rd = 15%
- T = 25%
- E = $600,000
- D = $400,000
2. Calculate Weights:
V = $600,000 + $400,000 = $1,000,000
E/V = 0.6 (60%), D/V = 0.4 (40%)
3. After-Tax Cost of Debt:
15% × (1 - 0.25) = 11.25%
4. Calculate WACC:
WACC = (0.6 × 25%) + (0.4 × 11.25%) = 15% + 4.5% = 19.5%
Conclusion: High-risk businesses have higher WACC.
Example 6: Optimal Capital Structure
Scenario: Finding balance between debt and equity.
1. Known Values:
- Re = 10%
- Rd = 5%
- T = 30%
- E = $700,000
- D = $300,000
2. Calculate Weights:
V = $700,000 + $300,000 = $1,000,000
E/V = 0.7 (70%), D/V = 0.3 (30%)
3. After-Tax Cost of Debt:
5% × (1 - 0.30) = 3.5%
4. Calculate WACC:
WACC = (0.7 × 10%) + (0.3 × 3.5%) = 7% + 1.05% = 8.05%
Conclusion: This capital structure minimizes WACC.
Example 7: International Company
Scenario: Multinational with different tax rates.
1. Known Values:
- Re = 11%
- Rd = 6%
- T = 40% (highest jurisdiction rate)
- E = $5,000,000
- D = $2,000,000
2. Calculate Weights:
V = $5,000,000 + $2,000,000 = $7,000,000
E/V ≈ 0.714 (71.4%), D/V ≈ 0.286 (28.6%)
3. After-Tax Cost of Debt:
6% × (1 - 0.40) = 3.6%
4. Calculate WACC:
WACC = (0.714 × 11%) + (0.286 × 3.6%) ≈ 7.85% + 1.03% ≈ 8.88%
Conclusion: Higher tax rates increase debt advantage.
Example 8: Utility Company
Scenario: Stable company with high debt levels.
1. Known Values:
- Re = 7%
- Rd = 4%
- T = 35%
- E = $3,000,000
- D = $7,000,000
2. Calculate Weights:
V = $3,000,000 + $7,000,000 = $10,000,000
E/V = 0.3 (30%), D/V = 0.7 (70%)
3. After-Tax Cost of Debt:
4% × (1 - 0.35) = 2.6%
4. Calculate WACC:
WACC = (0.3 × 7%) + (0.7 × 2.6%) = 2.1% + 1.82% = 3.92%
Conclusion: Utilities often have low WACC due to stability.
Example 9: Tech Startup
Scenario: High-growth company with venture capital.
1. Known Values:
- Re = 30%
- Rd = N/A (no debt)
- T = 21%
- E = $2,000,000
- D = $0
2. Calculate Weights:
V = $2,000,000
E/V = 1 (100%), D/V = 0 (0%)
3. WACC Calculation:
WACC = 30% (equal to cost of equity)
Conclusion: Startups have high WACC due to risk.
Example 10: Changing Capital Structure
Scenario: Company considering more debt.
1. Current Situation:
- Re = 12%
- Rd = 6%
- T = 30%
- E = $6,000,000
- D = $4,000,000
Current WACC: (0.6×12%) + (0.4×4.2%) = 9.28%
2. Proposed Change: Increase debt to $6,000,000, equity to $4,000,000
New WACC: (0.4×12%) + (0.6×4.2%) = 7.32%
Conclusion: Increasing debt (within limits) can reduce WACC.
Frequently Asked Questions about WACC
1. What is the purpose of calculating WACC?
WACC is used as a discount rate in financial modeling to evaluate investment opportunities. It represents the minimum return a company must earn to satisfy all its investors (both debt and equity holders).
2. How do you estimate the cost of equity?
The cost of equity is typically estimated using the Capital Asset Pricing Model (CAPM): Re = Rf + β(Rm - Rf), where Rf is the risk-free rate, β is the stock's volatility, and (Rm - Rf) is the market risk premium.
3. Why use market values instead of book values?
Market values reflect current investor expectations and the true economic value of capital, while book values are historical accounting figures that may not represent current reality.
4. What is the tax shield in WACC?
The (1 - T) factor accounts for the tax deductibility of interest payments. Since interest is tax-deductible, the effective cost of debt is reduced by the tax rate.
5. Can WACC be lower than the cost of debt?
Yes, when a company has significant equity financing and the after-tax cost of debt is very low, the weighted average can be below the nominal cost of debt.
6. How often should WACC be recalculated?
WACC should be updated whenever there are significant changes in market conditions, capital structure, risk profile, or tax laws - typically quarterly or annually.
7. What are the limitations of WACC?
WACC assumes constant capital structure, doesn't account for different project risks, and relies on estimates (like cost of equity) that may be imprecise.
8. How does debt affect WACC?
Initially, adding debt reduces WACC due to the tax shield and lower cost of debt. However, excessive debt increases risk, raising both debt and equity costs.
9. What is an optimal capital structure?
The mix of debt and equity that minimizes WACC while maintaining acceptable financial risk. This balance varies by industry and company circumstances.
10. Can WACC be negative?
In extremely rare cases with negative interest rates and peculiar capital structures, WACC could theoretically be negative, but this is highly unusual in practice.
