1. What is WACC?

The Weighted Average Cost of Capital (WACC) represents a firm's average after-tax cost of capital from all sources, including equity and debt. It's used as a hurdle rate for investment decisions and valuation.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

Where:

• \( E \) — Market value of equity
• \( Re \) — Cost of equity (required return)
• \( D \) — Market value of debt
• \( Rd \) — Cost of debt (yield to maturity)
• \( Tc \) — Corporate tax rate
• \( V \) — Total value (E + D)

Explanation: The formula weights the cost of each capital component by its proportion in the company's capital structure, with debt adjusted for tax shield benefits.

3. Importance of WACC Calculation

Details: WACC is crucial for capital budgeting decisions, company valuation (DCF analysis), and performance evaluation. It represents the minimum return a company must earn to satisfy all its investors.

4. Using the Calculator

Tips: Enter all values in USD for E and D, and as decimals for Re, Rd, and Tc (e.g., 0.08 for 8%). Ensure market values (not book values) are used for E and D.

5. Frequently Asked Questions (FAQ)

Q1: How do I determine the cost of equity (Re)?
A: Common methods include CAPM (Capital Asset Pricing Model) or DDM (Dividend Discount Model). CAPM is most widely used: Re = Rf + β(Rm - Rf).

Q2: What's included in market value of debt (D)?
A: Include all interest-bearing debt (bonds, loans, leases) at market values. For private companies, book values may be used as proxies.

Q3: Why adjust debt for taxes?
A: Interest payments are tax-deductible, making debt financing cheaper than equity from the company's perspective.

Q4: What are typical WACC ranges?
A: Most companies fall between 5-15%. Utilities often have lower WACC (6-8%), while tech startups may have higher WACC (12-20%).

Q5: When shouldn't WACC be used?
A: When evaluating projects with different risk profiles than the company overall, or when capital structure changes significantly.