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 common stock, preferred stock, bonds, and other forms of debt. It is used as a hurdle rate for investment decisions.

2. How Does the Calculator Work?

The calculator uses the WACC formula:

Where:

• \( E \) — Market value of equity
• \( V \) — Total market value of equity and debt (\( E + D \))
• \( R_e \) — Cost of equity (%)
• \( D \) — Market value of debt
• \( R_d \) — Cost of debt (%)
• \( T \) — Corporate tax rate (decimal)

Explanation: The formula weights the cost of each capital source by its proportion in the company's capital structure, with debt costs adjusted for tax benefits.

3. Importance of WACC Calculation

Details: WACC is crucial for capital budgeting decisions, company valuation, investment analysis, and determining the minimum acceptable return on investments. It helps companies evaluate whether to proceed with projects or acquisitions.

4. Using the Calculator

Tips: Enter weights as decimals (e.g., 0.6 for 60%), cost percentages as whole numbers (e.g., 8 for 8%), and tax rate as decimal (e.g., 0.25 for 25%). Ensure E/V + D/V = 1.

5. Frequently Asked Questions (FAQ)

Q1: Why is debt cost multiplied by (1 - T)?
A: Interest expenses are tax-deductible, reducing the effective cost of debt for the company.

Q2: What is a good WACC?
A: Lower WACC is generally better, but acceptable ranges vary by industry. Typically 6-12% for established companies.

Q3: How to calculate cost of equity?
A: Common methods include Capital Asset Pricing Model (CAPM) or Dividend Discount Model (DDM).

Q4: What if E/V + D/V doesn't equal 1?
A: The calculator assumes you're entering proportional weights. Ensure your inputs represent the complete capital structure.

Q5: When should WACC be recalculated?
A: WACC should be updated when capital structure changes, interest rates shift, or tax laws are modified.