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'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
• \( V \) — Total market value of equity and debt
• \( Re \) — 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, and financial decision making. It represents the minimum return a company must earn on existing asset base to satisfy creditors, owners, and other capital providers.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: Why do we multiply debt cost by (1-Tc)?
A: Because interest payments are tax-deductible, making the effective cost of debt lower than its nominal rate.

Q2: What are typical WACC ranges?
A: Most companies have WACC between 5-15%. Utilities often have lower WACC (5-8%) while tech firms may have higher (10-15%).

Q3: How to determine cost of equity?
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 or market values?
A: Always use market values for E and D, as WACC reflects current capital costs, not historical accounting values.

Q5: When is WACC not appropriate?
A: When evaluating projects with different risk profiles than the company's average, or for companies with complex capital structures.