Weighted Average Cost of Capital (WACC) Calculator
Calculate the Weighted Average Cost of Capital (WACC) for your business or project with our online calculator. Easy to use and accurate results.
WACC = (E/V x Re) + ((D/V x Rd) x (1 - Tc)) Where: E = Market value of the company's equity D = Market value of the company's debt V = Total market value of the company (E + D) Re = Cost of equity Rd = Cost of debt Tc = Corporate tax rate
What Is WACC Used For?
The weighted average cost of capital (WACC) is an important financial metric used by companies and investors alike. It is the average cost of all the capital used by a company, taking into account both equity and debt financing. But what is WACC used for exactly?
First and foremost, WACC is used as a discount rate to evaluate potential investments. By using WACC as the discount rate, companies can determine whether an investment will generate enough returns to cover the cost of capital. If an investment has a higher rate of return than the WACC, it is considered to be a good investment.
Additionally, WACC is used to determine the minimum rate of return that a company must earn on its investments to satisfy its investors. Investors expect to be compensated for the risk they take on by investing in a company, and the WACC represents the minimum return that they require.
Moreover, WACC also gives insight into the cost of having capital tied up. For instance, if the WACC is 5%, it means that for every $100 invested in the business, it costs $5 per month. This is particularly relevant for companies with large amounts of inventory that stay on the shelf for a long time before being sold. By understanding the cost of having capital tied up, companies can find ways to reduce their inventory and "save" the equivalent interest rate of the capital tied up.
In summary, WACC is a vital metric for companies and investors to assess investment opportunities, determine the minimum return required to satisfy investors, and understand the cost of having capital tied up.
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