The weighted average cost of capital calculator or WACC calculator allows you to determine the profitability your company requires for it to create value. This makes the calculator highly valuable for business owners and those who plan to start their own businesses. It uses the WACC formula, so if you have to calculate WACC, the calculator does the work for you.
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How to use the WACC calculator?
The weighted average cost of capital calculator is a very useful online tool. It’s simple, easy to understand, and gives you the value you need in an instant. Here are the steps to follow when using this WACC calculator:
- First, enter the Total Equity which is a monetary value.
- Then enter the Total Debt which is also a monetary value.
- Next, enter the Cost of Equity which is a percentage value.
- Enter the Cost of Debt which is also a percentage value.
- Finally, enter the last percentage value with is the Corporate Tax Rate.
- After entering all of these values, the cost of capital calculator automatically generates the WACC for you.
What is the formula for WACC?
For any entrepreneur, one of the main objectives is to increase the company’s value. To do this, you need to have a good amount for your starting capital to purchase the items you need to launch your business. There are several potential capital sources which fall into two main categories namely equity and debt.
The capital your business gains through debts or equity comes at a cost. For debts, you have to pay back more money than the amount that you borrowed because of the interest rate. But for equity, the calculations are a bit more complex.
In general, the cost of equity refers to all of the expenses you need to bear to persuade your company’s stakeholders that it’s a worthy investment. If the stakeholders fail to see that they’re not getting enough compensation from their investment, they might decide to sell all of their shares which, in turn, devaluates your company.
If you decide to finance your company with both debt and equity, you must combine the costs in a single metric to determine whether or not your company will make a profit. This metric is what we refer to as the weighted average cost of capital or WACC. To calculate WACC, use the WACC formula which is:
WACC = E / (E + D) * Ce + D / (E + D) * Cd * (100% – T)
where:
E refers to the equity
D refers to the debt
Ce refers to the cost of equity
Cd refers to the cost of debt
T refers to the corporate tax rate.
How do you calculate weights in WACC?
If you aren’t sure whether you comprehend the concept of WACC, take a look at some examples of how to compute the percentage value. Here, let’s have a concrete example where we assume that we calculate WACC for a small company. Here are the steps:
- Determine the amount of your capital that will come from equity. For this example, let’s assume that you have assets worth $700,000.
- Then determine the amount of your capital that will come from debt. For instance, you took a loan of $500,000.
- Check the interest rate of your debt too. Here, let’s assume that the interest rate for the loan you took is 8%.
- Come up with an estimation of the cost of equity. For our example, let’s say that it’s 15%.
- Decide the corporate tax rate, for instance, let’s set it at 20%.
- Now that you have all of the values, enter them in the WACC formula.
- Check your answer using the WACC calculator.
How do you calculate the cost of debt in WACC?
In WACC, the cost of debt is the effective rate your company pays on its debt. Most of the time, this refers to the debt after-tax, but it can also refer to the cost of debt of your company before you consider the taxes. The difference in the cost of debt before taxes and the cost of debt after taxes lies in the fact that you can deduct interest expenses.
In any company, the cost of debt is one aspect of its capital structure. This deals with how you finance all of your company’s growth and operations through the various fund sources you have including debt like loans, bonds, and more. Knowing the cost of debt is very helpful in WACC.
With it, you can have a better understanding of the overall rate your company must pay to use the different kinds of debt financing. This measure also gives your company’s investors an idea of the risk level compared to other companies. Generally, companies which come at a higher risk also have an increased cost of debt.
To calculate the cost of debt, you must first determine the total interest amount you need to pay on each of your debts for one whole year. Then divide this value by the total amount of your company’s debt. The quotient you get is your company’s cost of debt.
What is a typical WACC for a company?
WACC for companies may vary depending on the industry. For instance, if you compare Tech, Financial Services, and Real Estate companies, each of these industries have their own distinct WACC.
Small tech firms may only have minimal debt and a greater equity amount in their company structure which, in turn, translates to a higher WACC. But for larger tech companies, they may have a higher amount of debt. So, when you make assumptions about industries and WACC, you should be as specific as possible.
Most likely, retails have a larger debt amounts in the capital structure, especially when you consider the challenging nature of the retail environment. For real estate businesses, properties are often financed with debt. Therefore, part of the debt is quite high while the WACC is quite low.
For the financial services industry, WACC isn’t very significant because it gets distorted by the debt amount that the company possesses in its capital structure again, because of the industry’s nature.
