Quick Guide: Calculating Weighted Average Cost of Capital (WACC)
The WACC calculator is a useful tool to help you calculate a company’s cost of capital. But there are a few other important points you should know about calculating the weighted average cost of capital.
We’ll cover a few of them below, including:
- The WACC calculation formula,
- What is the WACC, and
- How to calculate WACC in Excel
By the end of this article, you’ll have everything you need to analyze the rate that a company is expected to pay investors and creditors to finance its assets.
How to calculate WACC
The WACC calculation formula is:
WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))
E = Value of the company's equity
D = Value of the company's debt
V = Total value of capital (equity plus debt)
E/V = Percentage of capital that is equity
D/V = Percentage of capital that is debt
Re = Cost of equity (required rate of return)
Rd = Cost of debt (yield to maturity on existing debt)
T = Tax rate
What is weighted average cost of capital (WACC)
A company can finance its operations through debt, equity, or a mix of both. The WACC measures the cost to obtain capital from each of these sources and calculates the total cost of capital.
WACC includes all sources of capital including bonds, long-term debt, common stock and preferred stock. The WACC formula looks at the pro-rata cost of debt and equity capital, in order to take into account the different costs associated with equity versus debt.
A company’s WACC is the rate of return required for a business to maintain operations. If a company’s return falls below their WACC, they won’t have enough cash to make payments on the capital required to operate.
How to calculate WACC in Excel
Microsoft Excel is a helpful tool you can use to calculate the WACC of a company.
First, set up a breakout of the Company's capital structure:
Next, calculate the cost of the Company's equity. This can be done by using the CAPM (Capital Asset Pricing Model) or Dividend Capitalization Model (if the company pays out a dividend).
In this example we'll use the CAPM:
The third step of calculating the WACC in excel is to find the Company's cost of debt using their borrowing rate and effective tax rate. Since interest is deductible for income taxes, the cost of debt is typically shown as an after-tax percentage.
You now have the capital structure, cost of equity and cost of debt laid out in front of you. The final step is to calculate the Company's WACC using the formula below:
And just like that, we've calculated a WACC of 11.74%. Well done!
The WACC formula is an important metric that helps investors better understand how much it costs a company to finance its operations.
If you know the inputs into the formula, you can easily calculate a company's WACC using the calculator above. If more work is required - using the WACC formula in Excel provided above is another great option.
But don’t stop there if you’re looking to invest in companies with impressive capital management and low cost of capital.
Use our customizable stock screener to find undervalued companies with strong financial ratios!