When an individual or firm starts thinking about expanding their assets, merging with another company or taking another big financial step, they will often take time to look at their current financial assets to see where they stand with their debt versus equity status. This figure is known as a weighted average cost of capital, or WACC. Calculating the WACC is simply a matter of finding values, similar to algebra and plugging in numbers.
Instructions
1. Gather all of your financial data regarding your total equity and debt financing. At the top of your paper, write the full equation:WACC = (E / V) x Re + (D / V) x Rd x (1 - Tc)It may look complicated and impossible, but it isn't. Most of these are just symbols for numbers you already have on your paperwork. You will have to calculate a couple of numbers, but not many. Let's get started.
2. Calculate your total cost of equity, represented as Re, and your total cost of debt, represented as Rd. You can calculate these by simply adding up all your equity and debt financing. Write the totals on your sheet as the symbol. For example, Re = 200,000 and Rd = 350,000. You're creating a list of the fill-ins for the symbols but not plugging them into the equation yet; that will come later after you have all the values for the letters.
3. Look up all the current market values, and add them together to get the firm's total market value of the equity. This is represented as E. Repeat with the current market value of the firm's debt, which is represented as D. Write these two values in your symbols column.
4. Find the value of V by adding E and D. The equation is V = E + D. Write the value of V in your values column. Look up the corporate tax rate, and fill in the value as Tc. Now that you have all you values, it's time to plug in all your numbers.
5. Fill in all the values you have written down. Write the numbers in the same spots as the letters in the equation in Step 1. For informational purposes, (E / V) is the percent of financing that is equity, whereas (D / V) is the percent of financing that is debt. After filling in all the values, use a calculator to do the mathematical work. That's it! Your calculator value is your answer.
