1. What is WACC?

The Weighted Average Cost of Capital (WACC) represents a company's average after-tax cost of capital from all sources including equity and debt. It's used as a discount rate in financial modeling and investment appraisal.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

Where:

• \( E \) — Market value of equity (GBP)
• \( V \) — Total market value of equity and debt (GBP)
• \( Re \) — Cost of equity (decimal)
• \( D \) — Market value of debt (GBP)
• \( Rd \) — Cost of debt (decimal)
• \( Tc \) — Corporate tax rate (decimal)

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 investment decisions, valuation, and capital budgeting. It represents the minimum return a company must earn on existing assets to satisfy its investors.

4. Using the Calculator

Tips: Enter all values in GBP for monetary amounts and as decimals for rates (e.g., 0.08 for 8%). Ensure V = E + D.

5. Frequently Asked Questions (FAQ)

Q1: How is cost of equity (Re) determined?
A: Typically calculated using CAPM: Re = risk-free rate + beta × equity risk premium.

Q2: What's included in market value of debt (D)?
A: All interest-bearing debt including loans, bonds, and leases at market values.

Q3: Why use after-tax cost of debt?
A: Interest expenses are tax-deductible, reducing the effective cost of debt.

Q4: What's a typical WACC for UK companies?
A: Varies by industry but generally between 6-12% for most established UK companies.

Q5: How often should WACC be recalculated?
A: At least annually or when capital structure, market conditions, or risk profile change significantly.