WACC Calculator
wacc calculator
Weighted Average Price
Rs. 0
What is Weighted Average Cost of Capital (WACC) ?
The Weighted Average Cost of Capital (WACC) measures the average rate at which the company expects to pay to finance its assets, based upon all present debt and equity in the market. It is an important financial determinant of how risky an investment is and how much it could cost the company. It is also one of the most important metrics used in assessing feasibility for projects. WACC is mostly used in discounted cash flow (DCF) analysis, which helps organizations and investors measure the present worth of all future cash flows. Lesser WACC means cheap financing because, on the other hand, a higher WACC reduces risk and increases the cost of capital. That is what is vital when it comes to corporate finance, investment analysis, and capital budgeting decisions.
What is the WACC (Weighted Average Cost of Capital) Calculator?
The WACC Calculator assists in calculating the average cost of capital, weighted by the proportions of debt and equity financing used by a company. WACC is crucial for evaluating investment opportunities and understanding the company’s required rate of return on new projects.
How does WACC (Weighted Average Price) is calculated?
The WACC formula is given by:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
- E: Market value of equity
- D: Market value of debt
- V: Total market value of equity and debt (E + D)
- Re: Cost of equity
- Rd: Cost of debt
- Tc: Corporate tax rate
Let's understand how the WACC calculator works with an example.
1. Buying from the secondary market
Suppose you purchase shares of Himalayan Reinsurance Company Ltd. (HRL) in three separate transactions, each at a different price and quantity from secondary market. The following table illustrates the details of these transactions.
| S.N. | Share Units | Price (Rs.) | Transaction Day |
|---|---|---|---|
| 1 | 100 | 815 | Sunday |
| 2 | 90 | 808 | Sunday |
| 3 | 150 | 802 | Monday |
Calculate the wacc
| Share Units | Purchase Price (Rs.) | Total (Rs.) | Broker Fee | SEBON Fee | DP Fee | Grand Total (After Fees) |
|---|---|---|---|---|---|---|
| 100 | 815 | 81,500 | 268.95 | 12.22 | 13.15 | 81,794.32 |
| 90 | 808 | 72,720 | 239.98 | 10.91 | 11.85 | 72,982.74 |
| 150 | 802 | 1,20,300 | 396.99 | 18.04 | 25 | 1,20,740.04 |
| Grand Total | 2,75,517.10 | |||||
Now, let's calculate the WACC of HRL
- Total Purchase Units: 340 units
- Grand Total: Rs. 2,75,517.10
WACC = Total purchase price / Total purchase units
=2,75,517.10 / 340
= 810.34 per share
Key Components of WACC
- Cost of Equity: This is the return expected by shareholders, often calculated using the Capital Asset Pricing Model (CAPM).
- Cost of Debt: The effective interest rate that the company pays on its debt. It’s tax-adjusted to reflect the tax-deductible nature of interest expenses.
- Debt-to-Equity Ratio: The proportion of debt and equity used by the company, which influences WACC and overall risk.
Additional Insights for Investors
- Investment Evaluation: Use WACC to assess whether a company’s returns exceed its cost of capital, indicating potential for profitable investments.
- Risk Assessment: A higher WACC often signals higher risk and expected return, whereas a lower WACC reflects stability.
- Optimizing Capital Structure: Companies aim to minimize WACC by balancing debt and equity to optimize financial performance.