WACC Calculator – Find Weighted Average Cost of Capital

Calculate the weighted average cost of capital (WACC) by entering the equity and debt below.

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Weighted Average Cost of Capital:

WACC:
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Learn how we calculated this below


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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 for the business.

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 made 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:

WACC = \left ( \frac{E}{V} \times R_{e} \right ) + \left ( \frac{D}{V} \times R_{d} \times \left ( 1 − T_{c} \right ) \right )

where:
E = total equity
Re = cost of equity
D = total debt
Rd = cost of debt
Tc = corporate tax rate

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:

WACC = \left ( \frac{\$100}{\$350} \times 0.08 \right ) + \left ( \frac{\$250}{\$350} \times 0.06 \times \left ( 1 − 0.25 \right ) \right )
WACC = 5.5\%

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, as well.

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 still remain the same.

You might also be interested in our weighted average calculator.