A Weighted Average Cost of Capital (WACC) Calculator
The Weighted Average Cost of Capital (WACC) represents the rate a company is expected to pay in financing its assets. The WACC calculates the company’s cost of capital by proportionately weighing the categories of capital, each of which would be in the form or debt or equity. The WACC for a company is the minimum that the company must earn on its assets to satisfy its owners and creditors.
The Value of the WACC for Investors
Capital funding for a company is derived from two sources: debt and equity. Within these two categories, companies may raise money through a variety of securities, including common and preferred equity, straight and convertible debt, warrants, options, and more. Each security holder seeks to generate a return on that investment. The WACC represents the return they can expect.
Calculating the WACC
The formula for the WAC can be written as:
The components of the formula include:
Market Value of Equity: Simply the total number of shares divided by the per share market value
Market Value of Debt: The market value of debt is can be more difficult to obtain directly, since many carry non-traded debt.
Total Market Value of Equity plus Debt: The sum of the debt and equity components.
Cost of Equity: Often calculated using the capital asset pricing model (CAPM).
Cost of Debt: Often determined using bond yield rates and bank loan interest rates.
Choosing a Discount Rate Based on the WACC
Due to the complexities of the WACC formula, results will usually vary among investors. Even so, the WACC can provide an effective tool in determining how much each dollar costs to finance a business. This is why many investors use the WACC to determine a discount rate.
The Stock Research Pro Valuation Software
The SRP Valuation software offers three modules to assess the value of a stock and the health of a company:
• Discounted Cash Flow (DCF)
• Net Current Asset Value per Share (NCAVPS)
• Dividend Discount Model (DDM)
Each module includes a video tutorial to guide you through the process.
_________________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
« Calculate the Net Asset Value of a Mutual Fund | Home | What is Behavioral Finance? »
Leave a Comment
You must be logged in to post a comment.