Weighted Average Cost of Capital Calculator

**Cost of Capital **

The weighted average cost of a company’s assets financed by debt or equity and indicates the cost of financing assets with equity and debt. It is a symbol for the overall required return on the firm as a whole, although it is also possible to calculate the cost of capital on a business unit level.

The cost of capital is also used as the discount rate when determining the economic feasibility of expansion projects, mergers/acquisitions or capital projects.

Formula WACC:

**D/(D+E) x Cost of Debt x (1-Tax%) + E/(D+E) x Cost of Equity**

Below is a hypothecial example:

**Cost of Debt**

Average interest rate on a company’s debt *: 6.0%

Adjust for Tax break of 25%: (1.5%)

Effective After Tax Interest rate: 4.5%

* Financing of riskier companies typically includes a risk premium for the risk the bank is bearing on this investment

**Cost of Equity**

2 ways to calculate the cost of equity. Cost of equity is the return the share holder would like to have for investing in this company’s stock. The percentage derrived from the calculations below is not necessarily a cash out flow but must be taken into consideration.

**First is the Discounted Dividend (DDM) Model:**

Dividend Year 1 / Share price Year 0 = Cost of Equity

E.g. dividend this year is 10, share price at beginning of the period was 9.

Cost of equity = 10 / 9 = 11%

**Second is the Capital Asset Pricing (CAPM) model:**

This model assumes that each shareholder would like to have a return greater than the least riskiest investment out there. US Treasury Bills are considered to be the safest investments and are a good approximation for the risk-free return. On top of this risk-free rate the shareholder wants to be compensated for the risk he is taking. This can be approximated by looking the returns companies are generating in the same industry, corrected for the volatity of the fund, also known as Beta factor. A beta below 1 is considered a defensive fund (low market volatity), or >1 aggressive fund (high volatity).

E.g. market return for this companies industry is 11%, risk free rate is 4.5% and a beta of 1.

Risk free rate*: 4.5%

Premium (Market 11%* – RF 4.5%) x Beta 1.0: 6.5%

Cost of Equity: 11%

**Calculating the Weighted Average Cost of Capital (WACC)
**Now we know the cost of debt (4.5%) and the cost of equity (11%) we can calculate the WACC using the formula:

**D/(D+E) x Cost of Debt x (1-Tax%) + E/(D+E) x Cost of Equity**

Lets assume the value of debt is 3B and the equity portion is 17B, total assets are thus 20B the following calculation would apply.

Weight of Debt: Debt 3B /Assets 20B = 15% x Cost: 4.5% = 0.68%

Weight of Equity: Equity 17B / 20B * = 85% x Cost: 11% = 9.35%

Weighted average cost of capital: 10.00%