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 common stock, preferred stock, bonds, and other forms of debt. It's 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
• \( D \) — Market value of debt
• \( V \) — Total market value (E + D)
• \( R_e \) — Cost of equity
• \( R_d \) — Cost of debt
• \( T_c \) — Corporate tax rate

Explanation: WACC 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, valuation analysis, and determining the minimum return a company must earn on existing asset base to satisfy its investors and creditors.

4. Using the Calculator

Tips: Enter all values in consistent currency units. Cost of equity and debt should be entered as percentages. Tax rate should be the corporate tax rate as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: Why is debt cost adjusted for taxes?
A: Interest payments on debt are tax-deductible, reducing the effective cost of debt by the tax rate.

Q2: What is a good WACC value?
A: Lower WACC is generally better, but it varies by industry. Typically ranges from 5-15% for most companies.

Q3: How is cost of equity calculated?
A: Often calculated using CAPM: Re = Rf + β(Rm - Rf), where Rf is risk-free rate, β is beta, and Rm is market return.

Q4: Should I use book values or market values?
A: Market values are preferred as they reflect current investor expectations and company valuation.

Q5: What are the limitations of WACC?
A: Assumes constant capital structure, stable business risk, and may not be appropriate for projects with different risk profiles than the company.