Weighted Average Cost of Capital Calculator
What is the Weighted Average Cost of Captial (WACC)?
WACC stands for the weighted average cost of capital, which is used to combine the cost of debt and equity into one metric in order to find out if it will be profitable.
Entrepreneurs need outside capital to grow their business. Popular sources of capital typically come in two forms: debt and equity. Equity is the total value of all assets. Debt is the money you borrow.
The money you raise comes at a cost. Cost of debt is relatively simple and comes in the form of an interest rate. For example, if your interest rate is 10%, you have to pay $110 for every $100 you received. On the other hand, the cost of equity is less straightforward. Equity takes into account the expenses you need to make in order to convince stakeholders the company is worth investing in. If there is a disconnect between the risk stakeholders are taking and what they are being compensated for, they will likely sell their shares and will result in a decrease in value of the company.
In order to be profitable, the company’s rate of return should be higher than the WACC. If the rate of return is lower, it means the financing costs are not being covered.
What is WACC Used for?
The WACC serves as the discount rate for calculating the Net Present Value of a company. In addition, it is also used to evaluate investment opportunities as a representation of the company’s opportunity cost. Commonly used as a hurdle rate, the rate of return should be greater than the WACC.