The easiest way to calculate the Weighted Average Cost of Capital.
What is the Weighted Average Cost of Capital?
Weighted Average Cost of Capital (WACC) is a financial metric representing the overall cost of capital raised for the company.
A company may be financed using different sources directly by equity from the investors, using debt or emitting bonds. Moreover, each financing round may have additional terms, for example, different interest rates.
That's why metrics such as WACC are crucial for tracking the real cost of raising capital. It is essential for companies using external financing because this value should be lower than the Return on Invested Capital metric. Otherwise, it would mean the company is ineffective in utilizing raised capital to generate profits.
How to calculate WACC?
The WACC formula is derived directly from the weighted average equation.
WACC = (E / V) × Ce + (D / V) × Cd × (1 − T)
- E - company's equity value,
- D - company's debt value,
- V = E + D is the total market value of the company's financial assets
- Ce - the cost of equity,
- Cd - the cost of debt,
- T - the corporate tax rate.
See also: ROCE Calculator.