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.

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)
• \( Re \) — 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 investment appraisal, valuation (DCF analysis), and financial decision-making. It represents the minimum return a company must earn to satisfy all its investors.

4. Using the Calculator

Tips: Enter all values in dollars except for percentages (cost of equity, cost of debt, tax rate). Ensure total value equals the sum of equity and debt.

5. Frequently Asked Questions (FAQ)

Q1: Why do we multiply debt cost by (1 - Tax Rate)?
A: Interest payments are tax-deductible, so the after-tax cost of debt is lower than the nominal interest rate.

Q2: How is cost of equity determined?
A: Typically calculated using CAPM: Re = Rf + β(Rm - Rf), where Rf is risk-free rate, β is beta, and (Rm - Rf) is market risk premium.

Q3: What's a good WACC?
A: Varies by industry. Lower WACC is generally better, indicating cheaper financing. Compare to industry averages.

Q4: Should I use book values or market values?
A: Always use market values for equity and debt when available, as they reflect current costs.

Q5: How often should WACC be recalculated?
A: Regularly, especially when market conditions change, capital structure shifts, or when making major investment decisions.