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Weighted Average Cost of Capital
You have to fill all fields that you see on the left side to know Weighted Average Cost of Capital (WACC).
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Want to calculate the WACC or weighted average cost of capital? This online WACC calculator helps to calculate the weighted average cost of capital depend on the cost of equity and the after-tax cost of debt. The tool uses the simple weighted average cost of capital formula to perform WACC calculation within a blink of eyes.
Well, before knowing about this weighted average cost of capital calculator, let’s start with the term “WACC.’
WACC is an acronym for a Weighted Average Cost of Capital; it is said to be as the average after-tax cost of a firm’s various capital sources, including common shares, preferred shares, and debt. More specifically, WACC is the average that a firm expects to pay to finance its assets. The purpose of calculating WACC to figure out the cost of each part of the firm’s capital structure that depends on the proportion of equity, debt, and preferred stock it has. Keep in mind, all components of the cost of capital are calculated at the current market rates.
WACC formula uses simple WACC equation for a calculation of a firm’s cost of capital in which each category is proportionally weighted. It is said to be as the average rate that a firm is expected to pay to its stakeholders that helps to finance its assets.
The mathematical WACC equation of the formula for WACC is as follows:
WACC = (E/V × Re) + [(D/V × Rd) × (1-Tc)]
The simple WACC calculator helps to calculate WACC or the weighted average cost of capital for a firm by using the simple WACC formula. The calculation by our weighted average cost of capital calculator can be done according to the input values of the cost of equity, total equity, cost of debt, total debt and corporate tax rate.
Read on to know how this weight of debt calculator works!
The calculation of the weighted cost of capital becomes easy with this smart tool, read on to know about the step-by-step guide:
To find WACC, you can use the above simple WACC formula – let we explain with the example and how to do a weighted average cost of capital calculation.
Suppose the firm has the following information:
Let, put these values into the mathematical WACC equation of the weighted average cost formula:
WACC = (E / V) × Re + (D / V) × Rd × (1 − Tc)
WACC = [(14000 / 14000 + 6000) × 0.125] + [(6000 / 14000 + 6000) × 0.07 × (1 − 0.2)]
The WACC for this firm is 10.43%
However, you can put these all values in the above wacc calculator to get the same answer!
The Weighted Average Cost of Capital or WACC serves as the discount rate for determining the NPV (Net Present Value) of a business. Also, it is used to evaluate investment opportunities, as WACC is considered to indicate the firm’s opportunity cost. That’s why; it is account as a hurdle rate by companies.
Well, the market value weights are appropriate compared to book value weights. However, the historical market value weights are something that must be used for WACC calculation out of the three options that are; marginal weights, historical book value weights, and historical market value weights.
If shareholders require a 20 return, and debtholders require a 10% return on their investment, then, on the average, projects funded by the bag will have to satisfy debt and equity holders by returning 15%. This Fifteen percent is the WACC.
Weighted cost of capital or WACC is affected by factors including debt ratio of the firm and increase in the corporate tax rate. But, there are some other factors that affect WACC such as:
Weighted Average Cost of Capital or WACC is an expression of this cost that is being used to see if certain intended strategies/projects/purchases/ investments are worthwhile to undertake. Yes, WACC is expressed as a percentage, same as interest!
Experts depict that the lower a company’s WACC, the cheaper it is for a company to fund new projects. Well, a company looking to lower its WACC means that it may decide to increase its use of cheaper financing sources.
Tax rates, the firm’s capital structure and dividend policy, and even the firm’s investment policy are the factors that influence a company’s composite WACC.
Financial Management studies reported that the WACC or Weighted Average Cost of Capital formula doesn’t consider for the financial risk (it is the risk which comes with raising capital for projects). Also, it assumes that the costs of capital will & inputs will not fluctuate.
Usually, WACC is used to provide a discount rate for a financed project, it’s all because the cost of financing the capital is a fairly logical price tag that accounts on the investment. WACC is used to compute the discount rate used in DCF valuation model.
No doubt, knowing about the WACC or weighted average cost of capital for a firm is immensely important as it is a way to gauge the expense of funding future projects. According to optimistic studies, the lower a firm’s WACC, the cheaper it is for a firm to fund new projects.
The WACC formula assists in evaluating whether the company should finance the purchase of new assets with debt or equity by comparing the cost of both options. So, use the above weighted average cost calculator to understand how to calculate the WACC.