WACC calculator

This WACC calculator determines a company’s Weighted Average Cost of Capital (WACC), which represents the average rate of return required by investors and lenders to finance the company.

If the tax rate field is left empty, only the pre-tax WACC will be calculated. The after-tax WACC will only be displayed when a valid tax rate is entered.

Equity amount ($):

Cost of equity (%):

Debt amount ($):

Cost of debt (%):

Tax rate (%):

Pre-tax WACC: - %

After-tax WACC: - %

Related calculators:

Present value Future value Annuity Perpetuity IRR

What is WACC?

The Weighted Average Cost of Capital (WACC) is a key financial metric that represents a company’s average cost of raising capital. It combines the costs of equity and debt financing, weighted according to their proportion in the company’s total capital structure.

WACC is important because it serves as the minimum required return a company must earn on its investments to maintain its value and satisfy its investors. It is widely used in corporate finance, investment analysis, and valuation models like Discounted Cash Flow (DCF) analysis.

Why is WACC important?

Capital budgeting: Companies use WACC to evaluate whether a project will generate value. If a project’s expected return is higher than WACC, it is considered a good investment.
Company valuation: In valuation models like DCF, WACC is used as the discount rate to calculate the present value of future cash flows.
Investment decision-making: Investors compare a company’s WACC with its return on invested capital (ROIC) to determine if the company is efficiently using its capital.
Financing strategy: Companies use WACC to optimize their capital structure by balancing debt and equity financing.

Formula for WACC

WACC = \left( \frac{E}{E+D} \times r_E \right) + \left( \frac{D}{E+D} \times r_D \times (1 - T) \right)

where:

$E$ = Equity amount
$D$ = Debt amount
$r_E$ = Cost of equity (expected return by equity investors)
$r_D$ = Cost of debt (interest rate on debt)
$T$ = Tax rate (corporate tax rate)

Key points:

The pre-tax WACC assumes that there is no tax benefit from debt (i.e., tax rate = 0).
The after-tax WACC accounts for the tax shield on debt interest payments.
WACC is used in corporate finance to determine the discount rate for valuing a company’s projects and investments.

Example calculation of WACC

A company has the following financial data:

Equity amount ( $E$ ) = $500 million
Cost of equity ( $r_E$ ) = 10%
Debt amount ( $D$ ) = $300 million
Cost of debt ( $r_D$ ) = 5%
Tax rate ( $T$ ) = 25%

Step 1: Calculate the total capital

\text{Total capital} = E + D = 500 + 300 = 800 \text{ million}

Step 2: Calculate the weights

\text{Weight of equity} = \frac{E}{E+D} = \frac{500}{800} = 0.625

\text{Weight of debt} = \frac{D}{E+D} = \frac{300}{800} = 0.375

Step 3: Calculate pre-tax WACC

\text{Pre-tax WACC} = (0.625 \times 10\%) + (0.375 \times 5\%)=8.125\%

Step 4: Calculate after-tax WACC

\text{After-tax WACC} = (0.625 \times 10\%) + (0.375 \times 5\% \times (1 - 0.25))=7.656\%

Final results

Pre-tax WACC = 8.125%
After-tax WACC = 7.656%

This means that, on average, the company must earn at least 7.656% (after tax) on its investments to satisfy both equity and debt holders.