WAAC Excel Calculator

WACC meaning in simple words

WACC means the cost of running your business, which includes the interest you pay on loans or paying dividends to investors and all the general costs that are levied to run a business every day.

WACC Example with Calculations

Suppose you and your friends open a McDonald’s franchise. To get started, you need money for rent, equipment, and, of course, all those delicious burgers! You get the money in two ways:

Borrowing from the bank (debt): The bank charges you interest for using their money, which is the cost of debt. Let’s say it’s 5.18% after considering tax benefits.

Investing your own money (equity): This is like putting your own savings into the business. You expect a return on your investment for taking the risk, which is the cost of equity and you expect a return of 9.62%.

WACC is like figuring out the average cost of all the money you used to open your McDonald’s. It considers:

The interest you pay to the bank (cost of debt): 5.18%

The return you expect for your own investment (cost of equity): 9.62%

How much money you borrowed from the bank compared to how much you invested yourselves (proportions):

Let’s understand how to calculate WACC in Excel.

Debt proportion: 29% (This means 29% of the total money came from the bank loan)

Equity proportion: 71% (This means 71% of the money came from your own investments)

Here, let’s calculate WACC in Excel:

Multiply the cost of each type of money by its proportion:

Debt: 5.18% * 29% = 1.50%

Equity: 9.62% * 71% = 6.84%

Add the results together: 1.50% + 6.84% = 8.34%

So, your WACC is 8.34%. This means that, on average, it costs you 8.34% to use all the money that funded your McDonald’s franchise. In other words, you need to make a profit of at least 8.34% to cover your borrowing and investment costs.

WACC Formula in Excel:

It takes the percentage of loan you have (weight of debt) and multiplies it by the interest rate you pay (cost of debt) and adds to the percentage of equity (weight of equity) multiplied by the (cost of equity)

 WACC= (Cost of Equity * Equity to Total Capitalization) + (After-Tax Cost of Debt * Debt to Total Capitalization)

Let’s Understand the Values in the Excel calculator

Capital structure

• Debt-to-total capitalization (DTC) is a financial metric that measures the proportion of a company’s total debt compared to its total capital. Total capital represents all the funds used to finance the company’s operations, including both debt and equity.

In simpler terms:

Debt: money borrowed by the company, like loans or bonds.

Equity: money invested in the company by owners or shareholders.

Total capital: debt + equity.

Debt-to-Total Capitalization: Debt/Total Capital (expressed as a percentage).

• Equity to total capitalization (ETC) same as DTC it is the proportion of company’s total Equity compared to its total capital.

ETC: Equity / Total Capital (expressed as a percentage)

Cost of equity calculation.

• Risk free rate:  It’s just a theoretical concept representing the expected return from an investment with zero risk. So, the actual risk-free rate depends on individual users but to get a number it is usually consider to be the yield of short term government bond like Treasury Bills as they are backed by govt and unlikely to default.
• Equity Risk Premium: ERP is the percentage of Return which investors demand to invest in a particular stock or company rather than to invest in risk free investments. It’s the extra reward you get for taking on the risk of owning stocks over safer options like government bonds
• Levered Beta: also known as equity Beta. Leveled beta is like measuring how much your stock portfolio “moves” compared to the market, considering the extra risk from your loan or debt.                                                                                                                                                                                                                                                                                                              Leveled beta compares the percentage change in a company’s stock price to the percentage change in the market index (e.g., S&P 500) over a specific period.

                  Levered beta = Unlevered beta * (1 + (Debt-to-Equity Ratio * (Cost of Debt – Risk-Free Rate))).

• Where Unlevered beta measures company debt without considering the debt.

In our WACC excel template we have set the value of levered beta to 1.19 but you can change according to your calculations.

• Cost of Equity: When you multiply levered beta with Equity risk premium and add risk free rate you will get Cost of Equity.                                                                                                                                   It is basically the return that investors expect for putting their money into a company’s stock.

Cost of Equity = Levered beta * Equity Risk Premium + Risk Free Rate

Cost of Debt Calculation

• Cost of debt: When a company issues debt, the cost it incurs for the use of these funds is called the cost of debt. It is the interest rate a company pays to borrow money, essentially the price they pay for using debt financing.
• Tax-Rate: Tax rate refers to the percentage of your income or other taxable base that you have to pay as tax to the government. It varies country to country and state to state.
• After Tax Cost of Debt: It means the effective cost of borrowing money for a company, considering the tax shield benefit from interest expense deductions.                                      In simple words, as we already know the cost of debt includes the debt and its interest. So, the govt allows business to deduct their loan interest from their taxable income hence lowering the tax amount, thus we subtract the tax from the cost of debt.

After-tax cost of debt = Cost of debt * (1 – Tax rate)

Please leave a comment if you want to tell us about our excel WACC calculator or about the WACC calculation in excel template.