WACC Calculator – Find Weighted Average Cost of Capital
Calculate the weighted average cost of capital (WACC) by entering the equity and debt below.
Weighted Average Cost of Capital:
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Andrew holds a Bachelor's degree in Finance and a Bachelor's degree in Political Science from the University of Colorado and specializes in finance, real estate, and life insurance.
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How to Calculate the Weighted Average Cost of Capital
There are many different variables a business will consider when trying to determine whether a proposed investment is a good idea or not.
They should start by considering their expected return on investment, but even if the ROI numbers are accurate, the business will also need to consider how much it costs to get the money it needs to invest.
The weighted average cost of capital (WACC) is a figure that demonstrates how much, on average, it costs a business to obtain the capital it needs. Below, we will explain how to calculate WACC and also answer some of the most pressing questions that you might have.
What is Weighted Average Cost of Capital (WACC)?
Most companies obtain capital from multiple sources, including common stock, preferred stock, bonds, and debt.
However, not all sources of capital financing are equal — WACC calculations enable firms to weigh each source of debt accordingly.
The WACC calculation involves two primary components: debt financing and equity financing. Once you have calculated the WACC, you can see the minimum return on investment you need for a prospective offer to be “worth it.”
WACC Formula
In order to calculate the WACC, you will first need to identify six corresponding variables. These include total equity, cost of equity, total debt, cost of debt, and the corporate tax rate.
You will also need to consider the sum of the equity plus debt.
Once you have determined these variables, you can then plug them into the formula:
where:
E = total equity
Re = cost of equity
D = total debt
Rd = cost of debt
Tc = corporate tax rate
V = sum of equity plus debt
Calculating the weighted average cost of capital is actually a bit easier than this formula might suggest. Let’s take a closer look using the example below.
Example of How to Calculate WACC
Here’s an example of how to calculate WACC. Using the formula above, suppose:
Total Equity = $100
Cost of Equity = 8%
Total Debt = $250
Cost of Debt = 6%
Corporate Tax Rate= 25%
Total Equity plus total Debt = $350
Plug the numbers into the formula:
Using the WACC calculator above will make it even easier for you to find the final figure.
What is WACC Used For?
WACC is a commonly used figure in the business world because it makes it simple for firms to quickly determine how much additional capital will cost. This figure can then be compared to the expected ROI for a proposed project and adjusted as needed.
But WACC can also be used at the household level.
If, for example, a household has multiple loan options available (with different costs), they can use a modified version of the WACC formula to determine what their average cost of borrowing will be.
In this case, the underlying principles will remain the same.
You might also be interested in our weighted average calculator.
Frequently Asked Questions
What does WACC tell you?
WACC tells firms how much additional capital will cost. They can then compare this number to the ROI for a potential project to determine if it’s “worth it.” If the WACC exceeds the ROI, then the firm is paying more for its capital than it’s earning and they may choose not to move forward with the project.
WACC can also be used to tell individuals an average of how much they will be paying on various loans to borrow.
Is WACC better high or low?
A higher WACC indicates that a business is paying more to obtain its capital needs, which means that it will be earning less of a return on its investment. Therefore, a lower WACC is more attractive to potential investors because this means the return they will receive is potentially higher.
Why is WACC so important?
WACC is a critical component to determining a profitable investment. It also shows the minimum ROI that a business must achieve to make a prospective offer “worth it.” If the WACC exceeds the ROI, the business is not actually earning a return for its investors and they may choose not to invest.