How to Calculate W A C C
What is W A C C?
Weighted Average Cost of Capital (WACC) blends debt and equity costs based on capital structure weights; company hurdle rate for investments.
Formula
Calculate WACC = (E/V)×r_e + (D/V)×r_d×(1-Tc)
- E
- E value — Variable used in the calculation
- V
- V value — Variable used in the calculation
- D
- D value — Variable used in the calculation
- Tc
- Tc value — Variable used in the calculation
Step-by-Step Guide
- 1Input debt weight/cost, equity weight/cost (from CAPM)
- 2Calculate WACC = (E/V)×r_e + (D/V)×r_d×(1-Tc)
- 3Use as discount rate for DCF
Worked Examples
Input
60% equity at 10%, 40% debt at 5%, 25% tax rate
Result
WACC ≈ 7.4% (blended cost)
Most companies use 8-10%
Common Mistakes to Avoid
- ✕Using market values instead of targets
- ✕Neglecting tax effects on debt
Frequently Asked Questions
Why multiply debt cost by (1-T)?
Tax deductibility of interest reduces effective debt cost.
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