WACC Calculator
This WACC calculator finds the weighted average cost of capital of a company. Example: 600 of equity at 10% and 400 of debt at 5% with a 25% tax rate give a WACC of 7.5%.
Example: Equity (E) 600 · Debt (D) 400 · Cost of equity r_E 10 % · Cost of debt r_D 5 % · Tax rate T_c 25 % → Result: WACC = 7.5 %. Source: Wikipedia – Weighted average cost of capital (formula after Brealey/Myers, Principles of Corporate Finance). Updated: .
How it is calculated
WACC (weighted average cost of capital) is the average of the cost of equity and the cost of debt, weighted by their shares of total capital. It acts as a hurdle rate: the return a company has to earn on its investments for owners and lenders to get what they require. In valuation it is the usual discount rate for cash flows.
Formula
WACC = E/V · r_E + D/V · r_D · (1 − T_c), where V = E + D. The factor (1 − T_c) reflects that interest expense can reduce taxable profit (the tax shield); how large that effect is in your case is your assumption. The cost of equity r_E is often estimated with the CAPM.
Worked example
Equity 600, debt 400, so V = 1,000 with weights of 60% and 40%. Cost of equity 10%, cost of debt 5%, tax rate 25%: debt costs 3.75% after tax. WACC = 0.6 · 10% + 0.4 · 3.75% = 6% + 1.5% = 7.5%.
- Use market values rather than book values for E and D where possible.
- More debt lowers the WACC arithmetically, but also raises risk and therefore r_E.
Frequently asked questions
What does WACC stand for?
WACC stands for weighted average cost of capital. It averages the cost of equity and the cost of debt, weighted by their shares of total capital.
Why is the cost of debt multiplied by (1 − tax rate)?
Because interest expense can reduce the tax bill, so the after-tax cost is lower: 3.75% for 5% interest and a 25% tax rate. Set the tax rate to 0 if you do not want to include this effect.
How do I find the cost of equity?
Often with the CAPM: risk-free rate plus beta times the market risk premium. See the CAPM calculator among the related tools.
Sources and legal basis
- Wikipedia – Weighted average cost of capital (formula after Brealey/Myers, Principles of Corporate Finance)
- Wikipedia – Gewichtete durchschnittliche Kapitalkosten
As of: · Editorial policy
Related tools
- CAPM CalculatorCAPM calculator for the expected return from the risk-free rate, beta and expected market return, with the market risk premium and the formula worked out.
- Net Present Value CalculatorNet present value calculator: enter the initial investment, discount rate and yearly cash flows to get present values, the NPV and the steps shown in full.
- IRR calculatorIRR calculator: enter your cash flows to get the internal rate of return, net present value at your discount rate, MIRR and the payback period, with a table.
- Present Value CalculatorPresent value calculator: what is a future amount or a stream of payments worth today? Handles lump sums, annuities and perpetuities, with a rate comparison.
- ROI calculatorROI calculator: return on investment, profit and annualized ROI for any holding period, plus a DuPont mode splitting ROI into profit margin and asset turnover.
- Current Ratio CalculatorCurrent ratio calculator with quick ratio and cash ratio from balance sheet items: cash, receivables, inventory and current liabilities, with the steps shown.
- Margin calculatorMargin calculator: enter cost or price plus margin, markup or profit and get the rest – with totals by quantity and a margin table for volume price tiers.
- EBITDA CalculatorEBITDA calculator from net income, interest, taxes and D&A, or from revenue and operating costs, with EBIT and EBITDA margin and the formulas worked out.
- Return on equity calculatorReturn on equity calculator: work out ROE from net income and shareholders’ equity, optionally using average equity, with the formula.