WACC Calculator

How to use and understand a WACC Calculator.

3 minute read

Free WACC Calculator Tool

The WACC calculation uses pretty simple math (multiplication, division, addition, subtraction). With this in mind, you can check out this free calculator below to generate WACC in a matter of seconds.

What is WACC?

WACC stands for a company’s Weighted Average Cost of Capital. This will lead most beginners to ask two follow-up questions: what is a company’s cost of capital and why do we need to use a weighted average?

Cost of Capital

All companies need to raise money (also known as capital) in order to fuel their business operations. This action of raising capital will always come at a cost as investors don’t give out money for free.

Companies raise capital through debt or equity. 

  • Debt: Businesses can for instance borrow money by taking out a loan or issuing a bond. This loan will come with an interest rate which represents the cost of capital or really how much it costs to borrow X amount of money. This is otherwise known as the cost of debt.
  • Equity: Businesses can sell or issue shares to receive money in exchange for a piece of ownership in the business. Equity investors will require or expect a certain return on their investment. That expected return represents the equity cost of capital, otherwise known as the cost of equity.

Applying a Weighted Average

So why do we use a weighted average? Well, different companies will have different proportions of debt and equity funding. Some companies may use a lot of debt and little equity, while others will opt to use less debt and more equity. 

So, in order to better estimate the total cost of capital between these two methods, you can use a weighted average of your cost of debt and cost of equity.

WACC Equation

The weighted average cost of capital can be calculated with the following formula:

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

WACC Formula Inputs

  • E = the market value of the company’s equity. This is typically represented by a company’s market capitalization.
  • D = the market value of the company’s debt. This debt figure can be found in the liabilities section of a company’s balance sheet.
  • V = E + D. V is really the total value of the combined debt and equity of a company.
  • Re = Cost of equity. This is typically calculated using the CAPM formula.
  • Rd = Cost of debt. This is typically represented by the effective interest rate of the company’s debt.
  • T = Corporate tax rate. In the USA, you can use a simplifying assumption with the standard 21% corporate tax rate.

Formula Explained

Based on the inputs, you’ll see that your are essentially calculating the company’s equity weight with (E/V) and multiplying by the cost of equity Re. Similarly, you’ll do the same with the debt weight (D/V) and multiply that figure by the cost of debt. This reflects your weighted average.

Accounting for Tax

However, you’ll notice that with debt you have an extra step where you multiply by (1 - tax rate). This gives you the after-tax cost of debt. Using the after-tax cost of debt is more accurate since a company’s interest payments can reduce taxable income and create what’s known as an interest tax shield. 

Additional Resources

Being able to calculate WACC is a good starting point, but learning how to truly understand and apply WACC is the next big step.

Most aspiring financial analysts should understand why this calculation is important and how you can apply WACC to create fundamental financial models used by investment professionals. If this is something you are interested in, check out our Complete Finance and Valuation Course and more with the get started button below.

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Michael Quach
Michael Quach
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