If you want to calculate the return your company must earn to meet its requirements for its investors, creditors and/or owners using its current assets, use the weighted average cost of capital (WACC) equation. The WACC is calculated using the financial data that is available from a company's financial records, such as its total equity and debt. This information is available from its income statement, balance sheet and/or annual reports. The WACC is one of the indicators used to determine the overall financial health of a company.
1. Collect all of the financial information you need to perform the WACC calculation: the cost of your company's debt and equity, the market value of your company's debt and equity, the respective percentages of financing that is debt and equity and the corporate tax rate.
2. Write the WACC equation at the top of a blank sheet. The equation is: WACC = (E/V) × Re + (D/V) × Rd × (1 − Tc). The letters and numbers in the equation represent the financial data you need to perform the calculation. E is the market value of the company's equity and D is the market value of the company's debt.
3. Calculate the value of V by adding the values for E and D. V represents the total value of capital in the company.
4. Find the value of Re by totaling all of the company's equity, and the value of Rd by totaling all of the company's debt.
5. Check the corporate tax rate for your company and use it to represent the value of Tc. Variables that affect the corporate tax rate include the amount of income the company generated in the taxable year and the state in which it is located.
6. Substitute the numerical values for the appropriate letters in the equation to calculate the WACC.
- Write each financial number you locate next to its corresponding letter so that you will avoid making a mistake when entering the data in the WACC equation.
- If you have trouble finding the financial data you need to perform the calculation, request the information from your company's accountant or finance officer.