How to Calculate WACC for a Private Firm

The weighted average cost of capital (WACC) of a company shows investors how much it costs the company to raise money. A company can raise money either by selling stock, either privately or publicly, or by borrowing money from an outside source. The cost of equity is the amount of return investors require for them to invest in the company. The cost of debt is the interest rate at which the company can borrow money.

Find the company's total outstanding debt, total outstanding equity, the cost of debt, cost of equity and the effective tax rate. Total outstanding debt and equity is on the company's balance sheet. The effective tax rate equals the amount of taxes paid divided by net income.

Add the company's outstanding debt and equity to find total capital.

Subtract the company's effective tax rate from one. Then, multiply the result by company's cost of debt to find the company's after-tax cost of debt.

Divide the company's amount of debt by total capital. This is the weighted value of debt. Multiply the weighted value of debt by the company's after-tax cost of debt to find your weighted debt.

Divide the amount of equity by total capital. Then, multiply the result by the cost of equity. This is your cost of equity.

Add your cost of equity to your cost of debt to find WACC.

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About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.

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