WACC Calculator – Weighted Average Cost of Capital

Use this WACC calculator to compute a company’s weighted average cost of capital from its cost of equity, cost of debt, tax rate, and capital structure. Toggle between entering market values or capital structure weights, and see the full formula breakdown instantly.

WACC Calculator

Inputs

Use the same currency for equity and debt (e.g. USD).

Enter as decimal or percent – they stay in sync.

Results

Weighted average cost of capital (WACC)

–

Decimal: –

Capital structure

E / V = –, D / V = –

After‑tax cost of debt

rd(1 − T) = –

Formula breakdown

WACC = (E/V) × r_e + (D/V) × r_d × (1 − T)

Tip: Use WACC as the discount rate in DCF models for projects with similar risk to the overall firm.

What is WACC?

WACC (weighted average cost of capital) is the blended rate of return that a company must earn on its invested capital to satisfy both equity investors and debt holders. It combines the cost of equity and the after‑tax cost of debt, weighted by their proportions in the firm’s capital structure.

In valuation, WACC is typically used as the discount rate for free cash flow to the firm (FCFF) in discounted cash flow (DCF) models. It represents the opportunity cost of investing capital in a specific business rather than in alternative investments with similar risk.

WACC formula

Standard WACC formula:

\[ \text{WACC} = \frac{E}{V} \cdot r_e + \frac{D}{V} \cdot r_d \cdot (1 - T) \]

  • \(E\) = market value of equity
  • \(D\) = market value of interest‑bearing debt
  • \(V = E + D\) = total capital
  • \(\frac{E}{V}\) = equity weight
  • \(\frac{D}{V}\) = debt weight
  • \(r_e\) = cost of equity
  • \(r_d\) = pre‑tax cost of debt
  • \(T\) = corporate tax rate

Cost of equity (re) via CAPM

Capital Asset Pricing Model (CAPM):

\[ r_e = r_f + \beta \cdot (r_m - r_f) \]

  • \(r_f\) = risk‑free rate
  • \(r_m\) = expected market return
  • \(r_m - r_f\) = equity risk premium (ERP)
  • \(\beta\) = equity beta (systematic risk of the stock vs. market)

After‑tax cost of debt

After‑tax cost of debt:

\[ r_d^{\text{after‑tax}} = r_d \cdot (1 - T) \]

Because interest expense is usually tax‑deductible, the effective cost of debt to the company is lower than the nominal interest rate.

Step‑by‑step example

Suppose a company has the following characteristics:

  • Market value of equity \(E = \$800\) million
  • Market value of debt \(D = \$200\) million
  • Cost of equity \(r_e = 12\%\)
  • Pre‑tax cost of debt \(r_d = 5\%\)
  • Corporate tax rate \(T = 25\%\)
  1. Total capital: \[ V = E + D = 800 + 200 = 1{,}000 \text{ million} \]
  2. Weights: \[ \frac{E}{V} = \frac{800}{1{,}000} = 0.80 \quad (80\%) \] \[ \frac{D}{V} = \frac{200}{1{,}000} = 0.20 \quad (20\%) \]
  3. After‑tax cost of debt: \[ r_d (1 - T) = 0.05 \cdot (1 - 0.25) = 0.0375 \quad (3.75\%) \]
  4. WACC: \[ \text{WACC} = 0.80 \cdot 0.12 + 0.20 \cdot 0.0375 = 0.096 + 0.0075 = 0.1035 \quad (10.35\%) \]

The company must earn at least 10.35% on its invested capital to cover the required returns of both equity and debt providers.

When to use WACC as a discount rate

WACC is appropriate as a discount rate when:

  • You are valuing the entire firm (enterprise value) using FCFF.
  • The project or business unit has similar risk to the overall firm.
  • The capital structure is expected to remain relatively stable over time.

If a project has significantly different risk (e.g., a high‑risk new venture inside a stable utility), you should adjust the discount rate rather than blindly using the firm‑wide WACC.

Common mistakes when calculating WACC

  • Using book values instead of market values for equity and debt.
  • Forgetting to apply the tax shield on debt (using \(r_d\) instead of \(r_d(1 - T)\)).
  • Mixing nominal and real rates (e.g., nominal WACC with real cash flows).
  • Using a single WACC for projects with very different risk profiles.
  • Ignoring non‑operating items (excess cash, minority interests) when linking WACC to valuation.

FAQ

What is WACC? ▸

WACC (weighted average cost of capital) is the blended rate of return that a company must earn on its invested capital to satisfy equity investors and debt holders. It weights the cost of equity and after‑tax cost of debt by their proportions in the firm’s capital structure.

What is a good WACC value? ▸

There is no universal “good” WACC. Lower WACC means cheaper capital and higher project values, but it must be consistent with the company’s risk. Stable utilities often have WACC in the mid‑single digits, while early‑stage or highly cyclical companies can have double‑digit WACC.

Should I use market or book values in WACC? ▸

For valuation and capital budgeting, you should use market values of equity and debt, because WACC is meant to reflect the current opportunity cost of capital. Book values are based on historical costs and can be very different from economic reality.

How do I estimate the cost of equity? ▸

The most common approach is the CAPM: Cost of Equity = Risk‑Free Rate + Beta × Equity Risk Premium. You can estimate beta from regression or use industry betas, and take the equity risk premium from historical data or market‑implied estimates.

Why is the cost of debt adjusted for taxes? ▸

Interest expense is usually tax‑deductible, which creates a tax shield: the company pays less tax because it has debt. The effective cost of debt is therefore the nominal rate multiplied by (1 − tax rate), which is why WACC uses \(r_d(1 - T)\).