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 analyses.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

Where:

• \( E \) — Market value of equity
• \( V \) — Total value of capital (E + D)
• \( Re \) — Cost of equity
• \( D \) — Market value of debt
• \( Rd \) — Cost of debt
• \( Tc \) — Corporate tax rate

Explanation: The formula weights the cost of each capital component by its proportional value in the company's capital structure.

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 on its existing asset base.

4. Using the Calculator

Tips: Enter all values in consistent currency units. Cost of equity and debt should be entered as percentages (e.g., 8.5 for 8.5%). Tax rate should also be entered as a percentage.

5. Frequently Asked Questions (FAQ)

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

Q2: Should I use book or market values for E and D?
A: Always use market values when available, as WACC reflects current capital costs.

Q3: How often should WACC be recalculated?
A: Recalculate when capital structure changes significantly, interest rates change materially, or when doing new valuation work.

Q4: What if my company has preferred stock?
A: Add a third term for preferred stock: (P/V × Rp), where P is preferred stock value and Rp is its cost.

Q5: Why do we multiply debt cost by (1-Tc)?
A: This accounts for the tax shield benefit of interest payments, which are tax-deductible.