### Overview

**The Formula**

**E **= **Equity Value** of the Company

**V **= **Total Value of Debt** and **Equity** of a Company.

**D **= **Total Debt** of a Company.

**Tc **= **Tax Rate**.

**Re** = **Cost of Equity**.

**Rd** = **Cost of Debt**.

We can also present it as:

Weightage is the ratio of **Equity** and **Debt** concerning the summation of **Equity** and **Debt.**

### Components of WACC

**WACC** has four essential parameters or components. Without any of them, calculations are impossible.

**Market Valuation of Equity**

The market value of the Equity is the total price of outstanding shares of a particular company.

**Cost of Debt**

This is the price that the company must pay for **Debt** (bonds or loans). **The Cost of Debt** is a very good indicator of a company’s risk factor. Riskier companies have a higher **Cost of Debt** compared to other companies.

- This is calculated by the following formula:

**Cost of Debt**** = Interest rate x (1 – Tax rate)**

**Market Valuation of Debt**

Estimation of a company’s total Debt is troublesome as debt is rarely public. It can be calculated from the listed bond price or from the bank statements.

**Cost of Equity**

Cost of Equity is the rate of return of company issued stocks or shares as expected by the shareholder.

- When a share is issued, the company doesn’t pay any money for the stock. Instead, it sells a small chunk of the company share, and the share is bought by the shareholders.
- As the performance of the company fluctuates, so do the stock prices.
- This is the price the company must pay in the long run in order to generate investment. This cost is described as the
**Cost of Equity**. It is presented as the formula below:

**Cost of Equity = Risk Free Rate + Beta * (Market Return Rate – Risk Free Rate)**

### Step-by-Step Procedure to Calculate WACC in Excel

### Step 1: Prepare the Dataset

To calculate the **WACC**, we need to calculate some parameters first. Components are **Cost of Equity**,** Equity Evaluation**, **Cost of Debt**, **Debt Valuation, **etc.

**Cost of Equity, **for example, requires information like the **Rate of Risk-Free**, **Beta**, and **Market return**, while the cost** of Debt** requires information like **Rate**, **Tax Rate**, and **Credit Spread**.

**Equity** and **Debt **requirements vary wildly from company to company. **Equity** represents the total amount of money that the company would have to return if it decided to liquidate assets. The calculation may involve shares of different types, retained earnings, etc. In this case, we presented only the share quantity and the price per share.

**Read More: **How to Convert Percentage to Basis Points in Excel

### Step 2: Estimate Cost of Equity

- Select the relevant cell (
**C8**in this example) and enter the following formula:

`=C5+C6*(C7-C5)`

- Press
**Enter**.

### Step 3: Calculate Market Valuation of Equity

- Select the relevant cell (
**F7**) and enter the following formula:

`=F5*F6`

- Press
**Enter**.

**Read More: **How to Calculate Profitability Index in Excel

### Step 4: Estimate Cost of Debt

- Select the relevant cell (
**C14**) and enter the following formula:

`=(C11+C13)*(1-C12)`

- Press
**Enter**.

**Read More:** How to Calculate Time Weighted Return in Excel

### Step 5: Calculate the Market Valuation of Debt

- Select the relevant cell (
**F13**) and enter the following formula:

`=F11*F12`

- Press
**Enter**.

### Step 6: Estimate Gross Capital

- Select the relevant cell (
**F15**) and enter the following formula:

`=F7+F13`

- Press
**Enter**.

### Step 7: Calculate WACC (Weighted Average Cost of Capital)

- Select the relevant cell (
**F17**) and enter the following formula:

`=C8*(F7/F15)+C14*(F13/F15)*(1-C12)`

- Press
**Enter**.

### Step 8: Interpret Outcome

- In the example shown above, the
**WACC**is**31.42%.**While we didn’t add it, suppose the expected return is 15%. That means the business is losing money at a 16.42% rate (31.42%-15%). That makes this venture more volatile for investment. - On the other hand, if the
**expected return**was**35%**, the business is generating wealth at a rate of 3.58% (35%-31.42%). This investment is safer.

### Things to Remember

- The calculations seem pretty straightforward when all the numbers are entered into a worksheet, but the reality is that determining parameters like Equity and Debt is difficult.
**WACC**also assumes that the investment in the company, or the capital, will remain the same throughout the year, but this isn’t actually possible in most cases.

## Download Practice Workbook

Download this practice workbook below.

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