How to Calculate Wacc – Loan calculator

WACC Calculator

Use this calculator to determine a company's Weighted Average Cost of Capital (WACC).

Market Value of Equity (E):

Market Value of Debt (D):

Cost of Equity (Re) (%):

Cost of Debt (Rd) (%):

Corporate Tax Rate (Tc) (%):

Calculated WACC:

Enter values and click 'Calculate WACC'.

Understanding the Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) is a crucial financial metric that represents the average rate of return a company expects to pay to all its different capital providers, including common stockholders, preferred stockholders, bondholders, and other long-term lenders. It's essentially the cost of financing a company's assets.

Why is WACC Important?

WACC serves as a discount rate for future cash flows in valuation models, such as Discounted Cash Flow (DCF) analysis. It's the minimum rate of return a company must earn on its existing asset base to satisfy its creditors and investors. If a company's return on investment is less than its WACC, it is destroying value. Conversely, if the return exceeds WACC, it is creating value.

Investment Decisions: Companies use WACC to evaluate potential projects. A project's expected return must exceed the company's WACC to be considered value-accretive.
Valuation: Analysts use WACC to discount a company's future free cash flows to arrive at its intrinsic value.
Performance Measurement: WACC helps assess management's effectiveness in generating returns above the cost of capital.

The WACC Formula

The formula for WACC is as follows:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Let's break down each component:

E (Market Value of Equity): This is the total market value of a company's equity. It's calculated by multiplying the current share price by the number of outstanding shares.
D (Market Value of Debt): This represents the total market value of a company's debt, including bonds, loans, and other interest-bearing liabilities.
V (Total Market Value of the Company): This is the sum of the market value of equity and the market value of debt (V = E + D).
Re (Cost of Equity): This is the return required by equity investors. It can be estimated using models like the Capital Asset Pricing Model (CAPM). It reflects the risk associated with investing in the company's stock.
Rd (Cost of Debt): This is the effective interest rate a company pays on its debt. It's often calculated as the yield to maturity on the company's outstanding bonds or the average interest rate on its loans.
Tc (Corporate Tax Rate): This is the company's effective corporate tax rate. The cost of debt is tax-deductible, which provides a tax shield, hence the (1 – Tc) factor.

How to Use the WACC Calculator

Our WACC calculator simplifies the process of determining this critical metric. Follow these steps:

Market Value of Equity (E): Enter the total market value of the company's outstanding shares. For example, if a company has 10 million shares outstanding trading at $10 per share, E would be $100,000,000.
Market Value of Debt (D): Input the total market value of the company's debt. This could be the sum of all outstanding bonds and loans. For instance, $50,000,000.
Cost of Equity (Re) (%): Enter the cost of equity as a percentage. This is the return shareholders expect. A common range might be 8% to 15%. Let's use 12% for our example.
Cost of Debt (Rd) (%): Input the cost of debt as a percentage. This is the average interest rate the company pays on its debt. For example, 6%.
Corporate Tax Rate (Tc) (%): Enter the company's effective corporate tax rate as a percentage. This varies by jurisdiction and company. A typical rate might be 25%.
Click the "Calculate WACC" button. The calculator will instantly display the company's Weighted Average Cost of Capital.

Example Calculation

Let's use the example values pre-filled in the calculator:

Market Value of Equity (E): $100,000,000
Market Value of Debt (D): $50,000,000
Cost of Equity (Re): 12%
Cost of Debt (Rd): 6%
Corporate Tax Rate (Tc): 25%

First, calculate the total market value (V):

V = E + D = $100,000,000 + $50,000,000 = $150,000,000

Next, determine the weights:

Weight of Equity (E/V) = $100,000,000 / $150,000,000 = 0.6667
Weight of Debt (D/V) = $50,000,000 / $150,000,000 = 0.3333

Now, apply the WACC formula:

WACC = (0.6667 * 0.12) + (0.3333 * 0.06 * (1 – 0.25))

WACC = 0.080004 + (0.3333 * 0.06 * 0.75)

WACC = 0.080004 + (0.0200 * 0.75)

WACC = 0.080004 + 0.0150

WACC = 0.095004

Expressed as a percentage, the WACC is approximately 9.50%.

This means that, on average, the company must generate a return of at least 9.50% on its investments to satisfy its capital providers.