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Weighted Average Cost of Capital (WACC) Calculator

Calculates a firm's average cost of financing, considering both debt and equity, weighted by their proportion in the capital structure.

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Weighted Average Cost of Capital

Formula first

Overview

The Weighted Average Cost of Capital (WACC) represents the average rate of return a company expects to pay to all its security holders (debt and equity) to finance its assets. It is a critical metric used in capital budgeting to discount future cash flows of potential projects, ensuring that the project's expected return exceeds the cost of financing it. WACC reflects the riskiness of a company's overall operations and its capital structure.

Symbols

Variables

E = Market Value of Equity, D = Market Value of Debt, V = Total Market Value of Firm, = Cost of Equity, = Cost of Debt

Market Value of Equity
$
Market Value of Debt
$
Total Market Value of Firm
$
Cost of Equity
%
Cost of Debt
%
Corporate Tax Rate
%
WACC
Weighted Average Cost of Capital
%

Apply it well

When To Use

When to use: Apply WACC as the discount rate for evaluating new investment projects, particularly when the project's risk profile is similar to the company's existing operations. It's also used in company valuation (e.g., Discounted Cash Flow models) and for assessing the overall financial health and cost of capital for a firm. Ensure market values are used for equity and debt components.

Why it matters: WACC is fundamental for making sound capital budgeting decisions, as it provides the minimum acceptable rate of return a project must generate to create value for shareholders. A well-calculated WACC helps companies allocate capital efficiently, optimize their capital structure, and ultimately enhance shareholder wealth.

Avoid these traps

Common Mistakes

  • Using book values instead of market values for equity and debt.
  • Forgetting to apply the tax shield to the cost of debt.
  • Using WACC to discount projects with significantly different risk profiles than the company's average.

One free problem

Practice Problem

A company has market value of equity (E) of 200 million. The cost of equity () is 12%, the cost of debt () is 6%, and the corporate tax rate () is 30%. Calculate the company's WACC.

Market Value of Equity500000000 $
Market Value of Debt200000000 $
Total Market Value of Firm700000000 $
Cost of Equity0.12 %
Cost of Debt0.06 %
Corporate Tax Rate0.3 %

Solve for: WACC

Hint: Remember to calculate the total firm value (V) first and apply the tax shield to the cost of debt.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
  2. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe
  3. Wikipedia: Weighted average cost of capital
  4. Corporate Finance (12th ed.) by Ross, Westerfield, and Jaffe
  5. Principles of Corporate Finance (13th ed.) by Brealey, Myers, and Allen
  6. Richard A. Brealey, Stewart C. Myers, Franklin Allen. Principles of Corporate Finance. 13th ed. McGraw-Hill Education, 2020.
  7. Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe. Corporate Finance. 12th ed. McGraw-Hill Education, 2019.
  8. Ross, Westerfield, & Jaffe, Corporate Finance, 12th Edition, McGraw-Hill Education.