The Cost of Capital Calculator allows you to compute the weighted average cost of capital (WACC) for your business, considering both the equity and debt components. This calculation helps businesses determine the total cost of financing their operations.
How to Use the Cost of Capital Calculator
1. Input the cost of equity as a percentage.
2. Input the cost of debt as a percentage.
3. Enter the proportion of equity in your capital structure.
4. Enter the proportion of debt in your capital structure.
5. Click 'Calculate Cost of Capital' to see the weighted average cost of capital (WACC).
Calculation Formula
The cost of capital is calculated using the following formula:
Cost of Capital = (Cost of Equity * Proportion of Equity) + (Cost of Debt * Proportion of Debt)
Example Calculation
If the cost of equity is 8%, the cost of debt is 5%, the proportion of equity is 60%, and the proportion of debt is 40%, the cost of capital would be:
Cost of Capital = (8% * 60%) + (5% * 40%) = 6.8%
Importance of Calculating Cost of Capital
Understanding the cost of capital is crucial for making informed business decisions, particularly when it comes to investments, project evaluations, and long-term financing. It represents the minimum return a company needs to generate in order to satisfy its investors and lenders.