Weighted average cost of capital (WACC) calculator

Your company creates value for its shareholders by earning a return on their invested capital which is above the cost of that capital. This hurdle is the yardstick by which it can judge a project proposal. If the proposal clears the hurdle, it can give it further consideration.

Yardstick

How does your business compare the financial viability of a range of proposals? It could use the weighted average cost of capital (WACC) to establish a rate of return for it to use. If your company were to work with a WACC of, e.g. 10.6%, then only projects that give a higher return should be undertaken.

A proposal to be evaluated could be anything your company spends money on, or which generates a future stream of revenue, or both. This covers most business activities. For example, installing a new computer network, undertaking R&D, acquiring an investment property, building a generator, undertaking a joint venture or acquiring another company.

How do you calculate wacc?

The overall cost of your company’s capital reflects its gearing - the mix of debt and equity. Use our Weighted Average Cost of Capital (WACC) Calculator (Sheet 1) to work out the WACC for your company. For example, if 80% of your company’s capital is equity, it pays 9% on its loans and the shareholders’ required rate of return on their equity is 11%, your company's WACC is:

Sheet 2 - Cost of debt. Estimating the cost of debt is relatively easy when you use the formulae available with spreadsheets. There is inflow (the principal amount of the loan) and a series of outflows (any arrangement fee, commission, interest, and repayment of the principal) which you can plug into a spreadsheet to arrive at your WACC percentage.

Sheet 3 - Cost of equity. It’s trickier to value equity. Calculating the WACC for historical periods is straightforward when using figures from the financial accounts. When looking ahead, in theory you “project future dividends per share allowing for growth, treat the current share price as the inflow, and again use a spreadsheet to determine the rate of interest that ties these amounts together”. We've made it simpler for you. Arrive at a cost of capital by starting with the interest rate for a risk-free investment (e.g. government bonds) and marking it up by the return required to compensate for the risk of holding shares in your company. For example, if the return on government securities is 5% and your risk premium is +6%, then the required rate of return on your company’s equity (i.e. your cost of equity capital) is 5% + 6% = 11%.