How to Calculate WACC (Weighted Average Cost of Capital)

Calculate the total cost of the capital used to finance a business with these steps.

Instructions

  • Step 1: Multiply the down payment cost percentage by the down payment percentage. If the down payment cost percentage equals 30, multiply 30 by .5 to get 15.
  • Step 2: Add the last two numbers to determine the weighted average cost of capital. In our example, 15 plus 3 equals 18.
  • FACT: Before there was Excel, Microsoft's original spreadsheet program was called Multiplan. Microsoft did not introduce Excel until 1985 for the Mac and 1987 for Windows.
  • Step 3: Multiply this number by the down payment percentage and the annual interest on the seller's note. If the annual interest on the seller's note equals 8, the formula will read .75 times .5 times 8, which equals 3.
  • Step 4: Calculate 1 minus the business tax rate. If the business tax rate is 25 percent then this number 1 minus .25 which equals .75.
  • Step 5: Determine the down payment percentage. Divide the total amount down by the total purchase price. Keep this number aside -- you will use it later.
  • TIP: For example, if the purchase price is $80,000 and you have $40,000 to put down, the down payment percentage is .5 or 50 percent.
  • Step 6: Grab a calculator -- you will need it.

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