Our WACC Calculator helps investors and financial analysts quickly determine a company’s cost of capital. By combining the costs of equity and debt financing, it provides crucial insights into a firm’s financial structure and overall economic health.
WACC Calculator
Interpreting Your WACC Result
Use this table as a general guide to interpret your calculated WACC. Keep in mind that ideal WACC values can vary by industry and economic conditions.
| WACC Range | General Interpretation |
|---|---|
| Below 6% | Very low cost of capital. This could indicate a low-risk company or favorable market conditions. |
| 6% – 8% | Low cost of capital. Often seen in stable, large-cap companies or in low-interest-rate environments. |
| 8% – 10% | Moderate cost of capital. This is common for many established companies across various industries. |
| 10% – 12% | Above average cost of capital. May indicate higher risk or growth-stage companies. |
| 12% – 15% | High cost of capital. Often associated with higher risk industries or companies. |
| Above 15% | Very high cost of capital. Typically seen in high-risk or speculative investments. |
Note: These ranges are approximate and can vary based on economic conditions, industry specifics, and individual company characteristics. Always consider the broader context when interpreting WACC.
Understanding the WACC Calculator Inputs
Cost of Equity (rE): This represents the return a company must offer to shareholders to compensate for the risk they take by investing their capital. It’s typically calculated using models like the Capital Asset Pricing Model (CAPM) or the Dividend Growth Model.
Equity Value (E): This is the total market value of a company’s equity. For public companies, it’s calculated by multiplying the current stock price by the number of outstanding shares. For private companies, it may require more complex valuation methods.
Cost of Debt (rD): This is the effective interest rate a company pays on its debts, such as bonds and loans. It represents the cost of borrowing funds and is usually lower than the cost of equity due to the tax-deductibility of interest payments.
Debt Value (D): This represents the total market value of a company’s debt. It includes all interest-bearing liabilities, such as bonds, loans, and finance leases. For publicly traded bonds, use the market price; for other debts, the book value is often used as an approximation.
Corporate Tax Rate (t): This is the marginal tax rate applicable to the company. It’s used to calculate the tax shield on debt, as interest payments are tax-deductible. In the US, this includes federal and applicable state corporate tax rates.
How WACC is Calculated
The Weighted Average Cost of Capital (WACC) is calculated using the following formula:
\(WACC = (\frac{E}{V} \times r_E) + (\frac{D}{V} \times r_D \times (1-t))\)Where:
- E = Market value of equity
- D = Market value of debt
- V = Total market value of the firm’s financing (E + D)
- rE = Cost of equity
- rD = Cost of debt
- t = Corporate tax rate
This formula weights the cost of each capital component based on its proportion in the company’s capital structure, providing a comprehensive measure of the firm’s cost of capital.
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