WACC Calculator
Weighted average cost of capital, blending equity and after-tax debt by their share of the total.
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Interest is deductible, which is what makes debt cheaper here.
Result
- WACC
- 9.75%
- Equity share
- 70.00%
- Debt share
- 30.00%
- After-tax cost of debt
- 4.50%
- Tax shield saves
- 1.50%
The minimum return the business must earn to be worth financing
$700,000.00 of $1,000,000.00
6.00% × (1 − 25.00%)
Points off the cost of debt, because interest is deductible
$700,000.00 equity and $300,000.00 debt…
WACC = E/V × Re + D/V × Rd × (1 − Tc)
E/V = 0.7000, D/V = 0.3000
After-tax Rd = 6.00 × 0.7500 = 4.5000
0.7000 × 12.00 + 0.3000 × 4.5000
WACC = 9.75%
Formula — written step by step
700,000 equity, 300,000 debt…
WACC = E/V × Re + D/V × Rd × (1 − Tc)
V = 700,000 + 300,000 = 1,000,000
E/V = 0.7, D/V = 0.3
After-tax debt = 6% × (1 − 0.25) = 4.5%
0.7 × 12 + 0.3 × 4.5
WACC = 9.75%
E and D are the market values of equity and debt, Re and Rd their costs, and Tc the corporate tax rate. Debt is taken after tax because interest is deductible — which is the only reason it looks cheaper than equity here.
A worked example
Why more debt lowers WACC, until it does not
- Cost of equity
- 12%
- Cost of debt
- 6%, tax 25%
- Gearing
- varied from 0% to 60% debt
- 0% debt: WACC = 12.00%
- 30% debt: WACC = 9.75%
- 50% debt: WACC = 8.25%
- But lenders raise Rd as gearing climbs
Cheaper on paper, riskier in practice
The formula makes debt look free of consequence, because it holds Re and Rd fixed. In reality both rise with gearing: shareholders demand more for a riskier claim and lenders charge more for a thinner cushion. That is why real WACC curves are U-shaped and why the arithmetic alone never identifies an optimal capital structure.
How to use this calculator
- Use market values, not book values — the market capitalisation for equity, and the market value of debt rather than its face value.
- Cost of equity is usually estimated with CAPM: the risk-free rate plus beta times the equity risk premium.
- Cost of debt is the rate the company would pay to borrow today, not the historical coupon on old debt.
- The tax rate should be the marginal rate the business actually pays, which is often below the headline statutory rate.
The blended cost of financing
A business funds itself with a mix of equity and debt, and each has a price. WACC blends them in proportion to how much of each the company uses, giving a single rate that represents what its capital costs overall.
That figure is then the minimum return any investment must clear. Earn more than WACC and the business creates value; earn less and it would have been better off returning the money, however positive the accounting profit looks.
Why debt appears cheaper
Two things make debt look cheap. Lenders take less risk than shareholders, because they are paid first and hold a contractual claim, so they accept a lower return. And interest is tax-deductible in most jurisdictions, so a 6% coupon costs 4.5% after a 25% tax rate.
That deduction is the tax shield, and it is real — but it only exists where there is taxable profit to shield. A loss-making company pays the full pre-tax rate, which is why WACC computed with a statutory rate can badly understate the cost of capital for a business that is not yet profitable.
Market values, and the limits of the formula
The weights must use market values. Book equity is an accounting residue that can differ from market capitalisation by an order of magnitude, and a WACC built on it describes no real company.
The deeper limitation is that the formula holds the costs fixed while the weights move, implying that loading up on debt lowers the cost of capital indefinitely. It does not: both Re and Rd rise as gearing increases, and beyond some point the extra risk outweighs the tax shield. WACC is a useful number to compute and a poor guide to how much to borrow.
Formula & methodology
What this calculator assumes
- Uses market values of equity and debt, not book values. Book equity in particular can differ from market value by a wide margin, and using it produces a WACC that describes no real company.
- The tax shield assumes the business has taxable profit to deduct interest against. A loss-making company gets no such discount, and its true cost of debt is the full pre-tax rate.
- Assumes the capital structure is stable. A WACC computed at today’s weights does not describe a business that is about to releverage.
- Cost of equity is an input, not a fact — it is usually estimated with CAPM, and small changes in the assumed equity risk premium move it substantially.
Sources
- Brealey, Myers & Allen, Principles of Corporate Finance, 13th edition, McGraw-Hill, 2019 — the weighted average cost of capital.
What WACC is used for
| Use | Why WACC |
|---|---|
| Discount rate for NPV | The return the capital must earn to be worth using |
| Hurdle rate for projects | A project below WACC destroys value |
| Valuing a company (DCF) | Discounts free cash flow to the whole firm |
| Judging performance | Return on capital above WACC is value created |
WACC is the right discount rate only for projects of similar risk to the business as a whole. A speculative venture inside a stable company deserves a higher rate, whatever the company’s blended cost of capital happens to be.
Frequently asked questions
Should I use book or market values?
Market values. Book equity in particular is an accounting figure that can differ enormously from what the equity is actually worth.
How do I estimate the cost of equity?
Most commonly with CAPM: risk-free rate plus beta times the equity risk premium. It is an estimate, and the answer is sensitive to the premium you assume.
Why is debt multiplied by (1 − tax)?
Because interest is tax-deductible, so borrowing reduces the tax bill. That deduction only helps a company with taxable profits.
Can I use WACC to discount any project?
Only projects with similar risk to the business overall. A riskier venture needs a higher rate regardless of how the company as a whole is financed.