Weighted Average Cost Of Capital Calculator

The formula this calculator uses

WACC = (E / V) x Re + (D / V) x Rd x (1 - T)

E

The market value of equity

D

The market value of debt

V

Total capital, equity plus debt

Re

The cost of equity, the return shareholders demand

Rd

The cost of debt, the interest rate the company pays

T

The corporate tax rate, which makes debt cheaper than it looks

How to check the result by hand

1. 1

   Add equity and debt to get total capital

   Use market values. Here 600,000 of equity plus 400,000 of debt gives 1,000,000 of total capital to weight against.

2. 2

   Work out each source's share

   Divide each by the total. Equity is 0.6 of the capital and debt is 0.4. The two shares must add to one, which is a useful arithmetic check.

3. 3

   Convert the cost of debt to an after tax figure

   Multiply by one minus the tax rate. Debt at 6 percent with tax at 25 percent costs 4.5 percent, because the interest reduces taxable profit.

4. 4

   Weight each cost by its share and add

   Equity contributes 0.6 times 11 percent, which is 6.6 percent. Debt contributes 0.4 times 4.5 percent, which is 1.8 percent. Together they give 8.4 percent.

5. 5

   Apply it as a hurdle rate

   On 1,000,000 of capital the annual charge is 84,000. Any project returning less than 8.4 percent is consuming value rather than creating it, whatever the accounts say.