Cost of Capital Calculator
Calculate the weighted average cost of capital (WACC) and individual costs of capital components. This calculator helps determine the minimum return required for investment projects.
Capital Structure
Cost of Equity
Cost of Debt
WACC Results
Weighted Average Cost of Capital:
0.00%
Cost of Equity:
0.00%
Cost of Debt (After Tax):
0.00%
Capital Structure
Equity Weight:
0.00%
Debt Weight:
0.00%
Total Capital:
$0.00
Business Insights
Capital Structure:
N/A
Risk Profile:
N/A
Valuation Impact:
N/A
Understanding Cost of Capital and WACC
Cost of capital represents the minimum return required by investors for providing capital to a company. The Weighted Average Cost of Capital (WACC) combines the costs of different capital sources to determine the overall cost of financing.
WACC Formula and Components
WACC Formula
- WACC = (E/V × Re) + (D/V × Rd × (1 - Tc))
- E = Market value of equity
- D = Market value of debt
- V = Total market value (E + D)
- Re = Cost of equity
- Rd = Cost of debt
- Tc = Corporate tax rate
Key Components
- Cost of Equity: Required return for shareholders
- Cost of Debt: Interest rate on borrowed funds
- Capital Structure: Mix of debt and equity
- Tax Shield: Tax deductibility of interest
- Market Values: Current market valuations
Cost of Equity Calculation
CAPM Method
Most common approach for cost of equity
CAPM Formula
- Re = Rf + ß × (Rm - Rf)
- Rf = Risk-free rate (government bonds)
- ß = Beta (systematic risk measure)
- Rm = Expected market return
- Rm - Rf = Market risk premium
Alternative Methods
- Dividend Discount Model (DDM)
- Earnings Capitalization Model
- Bond Yield Plus Risk Premium
- Arbitrage Pricing Theory (APT)
Cost of Debt Calculation
Before Tax Cost
- Current yield on outstanding debt
- Yield to maturity on bonds
- Interest rate on loans
- Credit spread over risk-free rate
After Tax Cost
- Rd × (1 - Tc)
- Tax shield benefit
- Interest tax deductibility
- Effective cost to company
Capital Structure Weights
| Component | Weight Formula | Purpose | Market vs Book |
|---|---|---|---|
| Equity Weight | E / (E + D) | Equity portion of capital | Market value preferred |
| Debt Weight | D / (E + D) | Debt portion of capital | Market value preferred |
| Total Weight | E + D = V | Total capital value | Must equal 100% |
WACC Applications
Business Valuation
- Discount rate for DCF analysis
- Terminal value calculations
- Enterprise valuation
- Comparable company analysis
Capital Budgeting
- Project evaluation hurdle rate
- NPV calculations
- IRR comparisons
- Risk-adjusted returns
Factors Affecting WACC
Market Conditions
- Interest rate environment
- Market risk premium changes
- Investor risk appetite
- Economic conditions
Company Factors
- Credit rating changes
- Leverage adjustments
- Business risk changes
- Tax rate modifications
WACC Limitations
Assumptions
- Constant capital structure
- Perfect capital markets
- No transaction costs
- Homogeneous expectations
Practical Issues
- Beta estimation errors
- Market value vs book value
- Changing capital structure
- Tax shield assumptions
Key Takeaways for Cost of Capital
- WACC represents the minimum return required by investors for providing capital
- WACC combines cost of equity and after-tax cost of debt weighted by capital structure
- Cost of equity is typically calculated using CAPM: Rf + ß × (Rm - Rf)
- Cost of debt is the interest rate adjusted for tax deductibility
- Capital structure weights should use market values, not book values
- WACC is used as the discount rate in DCF valuation and capital budgeting
- Lower WACC means lower required returns and higher valuations
- WACC changes with market conditions, company risk, and capital structure