Weighted Average Cost of Capital – WACC Definition
A cost of capital must need to pay against corporate financing recognized weighted average cost of capital. Hence, WACC or Weighted Average Cost of Capital is a sum of all capital sources comprising debt, bonds, equity stocks, and preferred stocks.
Furthermore, it is the sum of the cost of debt, the cost of equity, and the preferred stock values of the corporation. There are two main sources of raising capital equity and debt.
Cost of Equity (Ke)
The cost of equity is a calculation of common stock to measure the proportion of equity shareholders’ investment in a project. Moreover, the cost of equity is the required rate of return on equity investment in the project.
Cost of Debt (Kd)
The cost of debt is the required rate of return on debt stock investment by the lenders.
What Weighted Average Cost of Capital Formula
Firstly and most essentially, we need to understand the theoretical formula of WACC which is calculated as follows:
Where;
E = Equity market value
D = Debt market value
Re = cost of equity
Rd = cost of debt
t = corporate taxation rate
E / (E+D)= Weightage of equity value
D / (E+D)= Weightage of debt value
How to Calculate WACC in Excel
Now, It will show you how to extract WACC value by using an Excel-based Calculator. For example, LuluLemon has a stock value comprised of both debt and equity capital. Thus, the total debt value is $1,000,000 acquired at a rate of 7%, and $2,500,000 as equity value at the rate of 4%, while the corporate tax rate is 25%.
Let’s, divide the above solution into three simple steps to understand it more precisely and effectively.
Step 1
So, first is to put all the desired data into the following given format total debt value, cost of debt (%), tax rate (%), total equity value, and cost of equity (%).
Step 2
Now, we need to calculate the total value of capital (debt+equity), and the weightage of both equity and debt values. Hence, the following image is showing the calculation of the weightage of both stocks.
Step 3
Last and most importantly, we need to use the WACC formula in excel as shown in the following image.
| =((E14*E22)+(E8*E20)*(1-E10)) |
Where,
E14 = Cost of Equity (%)
E22 = Weightage of Equity
E8 = Cost of Debt (%)
E20 = Weightage of Debt
E10 = Tax Rate (%)
WACC Calculation Excel Template
Also, you can download the template of the WACC calculator in Excel sheet by clicking on the button or using calculator online.