Calculate Weighted Average Cost of Capital (WACC) for investment analysis and business valuation. Analyze the cost of equity, debt, and overall capital structure.
Current market value of all outstanding shares
Current market value of all debt obligations
Required return for equity investors (CAPM, DDM, etc.)
Interest rate on debt (before tax)
Corporate income tax rate
WACC (Weighted Average Cost of Capital) represents the average rate a company pays to finance its assets. It's crucial for investment decisions, business valuation, and capital budgeting. WACC serves as the discount rate for future cash flows and helps determine if investments create value.
Cost of equity can be calculated using the Capital Asset Pricing Model (CAPM): Re = Rf + β(Rm - Rf), where Rf is the risk-free rate, β is the company's beta, and Rm is the market return. Alternatively, use the Dividend Discount Model (DDM) or estimate based on historical returns and risk premiums.
A "good" WACC depends on the industry and market conditions. Generally, lower WACC is better as it indicates cheaper financing. Technology companies might have WACC of 8-12%, while utilities might have 4-8%. Compare your WACC to industry averages and your return on invested capital (ROIC).
Capital structure significantly impacts WACC. More debt generally lowers WACC due to tax benefits, but excessive debt increases financial risk and cost of equity. The optimal capital structure balances the benefits of debt (tax shield) with the costs (financial distress). This creates an optimal debt-to-equity ratio that minimizes WACC.