How Do You Calculate The WACC From A Balance Sheet?
Weighted average cost of capital (WACC) is a calculation of a company’s cost of capital, or the minimum that a company must earn to satisfy all debts and support all assets. The calculation includes the company’s debt and equity ratios, as well as all long-term debt. Companies usually do an internal WACC calculation to assess overall company health. The larger and more complex a company is, the harder it is to determine WACC. Unfortunately, only some of the information needed to calculate WACC can be found on a balance sheet. Gather the required information from the balance sheet. Finding the information is the hardest step. Write out the full WACC equation and list the variables separately. It is a good idea to make a list of all your variables before rewriting the equation. WACC = [(E/V) * Re] + [(D/V) * Rd * (1-Tc)] Re= cost of equity (expected rate of return on equity) Rd = cost of debt (expected rate of return on debt) E = market value of company equity D = market value of company
