This WACC calculator estimates the Weighted Average Cost of Capital which measures the average rate that a company is expected to pay to finance its assets. There is in depth information on how to calculate this financial figure below the form.
How does this WACC calculator work?
This financial tool can help when trying to determine the weighted average cost of capital a firm has by considering the following variables that should be provided for the calculation process:
- Total Equity (E).
- Cost of equity in percentage format (Re).
- Total Debt (D).
- Cost of debt (Rd) as a rate.
- Corporate Tax Rate (Ctr) as a percent.
The algorithm behind this WACC calculator applies the formula explained here:
WACC = E/V * Re + [D/V * Rd * (1 - Ctr)]
V = The sum between the E and D
E/V = is the percentage of financing that comes from equity
D/V = is the percentage of financing that comes from debt.
Please consider that a WACC calculation should include all capital sources such as bonds, common or preferred stock and any type of long-term debts.
WACC is a financial indicator that measures the minimum rate of return a company must generate through the business it runs, in order to be able to pay in due time all of its security holders. It indicates the lowest acceptable return rate that must be achieved in order to pay all of its obligations to owners and creditors no matter of their type.
Example of a calculation
Assuming a company with the following figures:
- Cost of equity (Re) = 5%
- Total equity (E) = $500,000
- Cost of debt (Rd) = 3.5
- Total debt (D) = $100,000
- Corporate tax rate (Ctr) = 40%
■ Weighted Average Cost of Capital (WACC) = 4.52%
■ Market value of the equity (E) = $500,000.00
■ Market value of the debt (D) = $100,000.00
■ Percentage of financing that is equity (PFE = E/V) = 83.33%
■ Percentage of financing that is debt (PFD = D/V) = 16.67%07 Mar, 2015