The Weighted Average Cost of Capital Calculator allows you to determine how profitable your company should be in order to create value and with our calculator, you can evaluate the required profitability in real time.
The weighted average cost of capital (WACC) is an estimation of a company's cost of capital in which each category is respectively weighted. All springs of finance, like common and preferred stocks, bonds, and other debts borrowed for strategic purposes are used in its WACC calculation.
An enterprise’s Weighted Average cost of capital increases as the beta and degree of return on equity jumps up, the reason being that a spike in WACC represents a reduction in valuation and increased risk.
Say you’re a businessman, in which case, your primary aim would naturally be to increase your company’s value. And to achieve that objective, you’d frequently require a lot of capital to make essential purchases or to get your financial assets off the ground.
There is a variety of potential resources for capital like the common stocks, preferred stocks, bonds and even debts. They are typically distributed into two classes: equity, that is the whole value of all resources, and debt, which is the capital you can borrow.
The money acquired through equity or debts doesn’t come without costs of its own. The cost of debt is already quite up-front - you always have to return more capital that you borrowed (additional capital being in form of interest).
For instance, if the interest rate of the bank you borrowed the capital from is 7%, you have to return $214 for every $100 you acquired.
When it comes to the cost of equity, the evaluations are not really that candid. Commonly, the cost of equity is thought of as all the expenditures you have to endure so as to convince your shareholders that your enterprise is worth decent investments.
However, if the stakeholders believe that the risk they are taking is not being compensated, they will most probably sell their shares, which will cause your company to decrease in value.
If money is poured in your business through both debt and equity, then you have to unify the cost of debt and equity in one scale to determine its profitability. This scale of measurement is called WACC.
If the degree of returns to your enterprise is higher than the Weighted Average Cost of Capital, it is profitable. If however, the degree of returns is lower, it simply means your enterprise’s financial costs are free floating and not covered and that spells trouble.
To calculate WACC, you need certain parameters that are required in the formula of WACC.
Here you go:
WACC = E / (E + D) * Ce + D / (E + D) * Cd * (100% - T)
Where,
E stands for the equity,
D stands for debt,
Ce stands for the cost of equity,
Cd stands for the cost of debt, and
T stands for corporate tax rate.
The corporate tax rate takes into account the tax deduction on interest paid.
In case if you’re still wondering whether you understand it completely or not. You can take a look at the example given below. It describes how to determine WACC for a start-up or low end company in depth.
WACC = E / (E + D) * Ce + D / (E + D) * Cd * (100% - T)
WACC = $800,000 / ($800,000 + $600,000) * 16% + $600,000 / ($800,000 + $600,000) * 9% * (100% - 20%)
This WACC quantity can be employed in further evaluations as the cost of capital.
However, calculating WACC is easy using our WACC calculator as it uses weighted average cost of capital formula. It is free to use and does not require user registration or subscription.