WACC Calculator: Weighted Average Cost of Capital

Use this WACC calculator to estimate a company’s weighted average cost of capital: the blended return required by its equity investors and lenders, weighted by each source’s share of the company’s capital.

The standard formula is:

WACC = (E ÷ V × Re) + (D ÷ V × Rd × (1 − T))

where E is the market value of equity, D is the market value of debt, V = E + D, Re is the cost of equity, Rd is the pre-tax cost of debt and T is the corporate tax rate.

Enter your assumptions below to calculate WACC.

What Does the WACC Calculator Calculate?

Weighted average cost of capital, or WACC, estimates the overall cost of financing a company with both equity and debt.

Shareholders require a return for investing their money in the business. Lenders require interest for providing debt financing. Because a company normally uses some combination of the two, WACC combines those required returns according to their relative weight in the company’s capital structure.

For a company financed with common equity and debt, the basic formula is:

WACC = (E/V × Re) + (D/V × Rd × (1 − T))

The debt component is multiplied by (1 − T) because interest expense can create a corporate tax shield. That makes the after-tax cost of debt lower than the stated pre-tax borrowing cost when the interest deduction is usable.

How to Use the WACC Calculator

Start with the market value of equity. For a publicly traded company, this is generally its market capitalization: current share price multiplied by shares outstanding.

Next enter the company’s debt. Market value is theoretically preferable. In practice, the carrying value of debt is often used as an approximation when the debt does not trade publicly and its market value is unlikely to differ greatly from face value.

Enter the cost of equity, which represents the return shareholders require for bearing the risk of owning the company’s stock. This is not an accounting expense that can simply be copied from the income statement.

Then enter the company’s pre-tax cost of debt. Ideally, this reflects what the company would have to pay to borrow at current market rates rather than the coupon rate on debt issued years ago.

Finally, enter the applicable corporate tax rate. The calculator applies the tax adjustment to the cost of debt and weights the resulting equity and debt costs according to the company’s capital structure.

Worked WACC Example

Suppose a company has:

Total capital is:

V = $600 million + $400 million = $1 billion

The company is therefore financed with 60% equity and 40% debt.

Its after-tax cost of debt is:

6% × (1 − 25%) = 4.5%

Now weight the two financing costs:

WACC = (60% × 10%) + (40% × 4.5%)

WACC = 6.0% + 1.8%

WACC = 7.8%

Under these assumptions, the company’s weighted average cost of capital is 7.8%.

The arithmetic is straightforward. In real valuation work, estimating the inputs—especially the cost of equity and current cost of debt—is usually more difficult than applying the formula.

Where Do You Get the Cost of Equity?

The cost of equity is an estimate of the return investors require to own the company’s equity.

A common method is the Capital Asset Pricing Model, or CAPM:

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium

The risk-free rate is generally based on an appropriate government bond yield. Beta measures the stock’s sensitivity to market movements, while the equity risk premium represents the additional return investors require for holding equities instead of a risk-free asset.

For example, with a 4% risk-free rate, a beta of 1.2 and a 5% equity risk premium:

Cost of Equity = 4% + (1.2 × 5%) = 10%

Cost of equity is an estimate rather than a directly observable contractual rate, which is one reason reasonable analysts can calculate different WACCs for the same company.

Should WACC Use Market Value or Book Value?

Use market values for the capital weights whenever practical.

For publicly traded equity, market value is the company’s current market capitalization. Book shareholders’ equity is an accounting measure based largely on historical transactions and retained earnings. It can differ dramatically from what investors currently value the equity at.

Using book equity can therefore substantially distort the percentage of the company supposedly financed by equity versus debt.

Debt is somewhat different. Market value remains the theoretical preference, but much corporate debt does not trade continuously. When debt is close to par and the company’s credit conditions have not changed dramatically, book value can be a reasonable practical approximation.

The key point is that WACC is intended to represent the current economic cost of capital, so its weights should also reflect current economic values rather than historical accounting values whenever possible.

What Should You Use for the Cost of Debt?

The cost of debt should represent the company’s current pre-tax borrowing cost.

For a company with actively traded bonds, their current yield to maturity can provide a useful estimate. For companies without traded debt, analysts may estimate the rate the company would pay on new borrowing based on its credit risk and prevailing interest rates.

Do not automatically use the coupon rate on an old bond. A company might have issued debt at 3% when market rates were much lower and now face an 6% borrowing cost. WACC is intended to be forward-looking, so the current financing environment matters.

Also be careful not to enter an after-tax cost of debt if the calculator is already applying (1 − T). Doing so would apply the tax adjustment twice.

How Is WACC Used in a DCF Valuation?

WACC is commonly used as the discount rate in a discounted cash flow valuation when the model is discounting unlevered free cash flow, also called free cash flow to the firm or FCFF.

The logic is matching.

Unlevered cash flow belongs to all providers of capital before financing claims are allocated between lenders and shareholders. WACC therefore reflects the required return of those capital providers collectively.

This does not mean WACC is the correct discount rate for every cash flow.

If you are discounting cash flows available only to equity holders, the matching discount rate is generally the cost of equity rather than WACC. A project with materially different risk from the company’s normal operations may also deserve a project-specific discount rate rather than the company’s company-wide WACC.

A DCF can be mathematically precise and still produce a misleading valuation if the cash flow definition and discount rate do not match.

What Is a Good WACC?

There is no universal WACC that is automatically “good.”

WACC varies with the company’s industry, business risk, leverage, credit quality, interest rates, tax environment and investor return requirements. A stable utility and an early-stage technology company should not be expected to have the same cost of capital.

A lower WACC generally means capital is less expensive and, all else equal, produces a higher present value in a DCF. But the useful comparison is usually with the company’s historical cost of capital, appropriate industry peers and the expected return on the investment being evaluated—not an arbitrary universal benchmark.

If a project is expected to earn less than an appropriate risk-adjusted cost of capital, it may destroy economic value even if it generates a positive accounting profit.

Common WACC Mistakes

One of the most important mistakes is using book equity instead of market equity, which can produce completely different capital weights.

Another is using an outdated borrowing rate instead of the company’s current cost of debt.

A third is applying the debt tax shield twice by entering an after-tax borrowing rate into a formula that already multiplies debt cost by (1 − T).

Analysts can also create a mismatch by discounting equity-only cash flows with WACC or using the company’s normal WACC for a project whose risk is materially different from the rest of the business.

And because cost of equity, beta, risk premiums and borrowing costs are estimates, WACC should not be treated as a perfectly known physical constant. In important valuations, testing more than one reasonable WACC assumption is often more informative than pretending one estimate is exact.

Frequently Asked Questions

What does WACC stand for?

WACC stands for weighted average cost of capital. It combines the required returns of a company’s capital providers according to the proportion of financing supplied by each source.

What is the formula for WACC?

For a standard debt-and-equity capital structure:

WACC = (E/V × Re) + (D/V × Rd × (1 − T))

where E is equity, D is debt, V is total capital, Re is the cost of equity, Rd is the pre-tax cost of debt and T is the corporate tax rate.

Is WACC the same as the discount rate?

WACC is a discount rate, but it is not the correct discount rate for every valuation. It is commonly paired with unlevered free cash flow to the firm. Equity cash flows are normally discounted using the cost of equity.

Should WACC use market value or book value?

Market-value weights are preferred. Public-company equity should generally use market capitalization rather than balance-sheet book equity. Book debt is often used as a practical approximation when a reliable market value of debt is unavailable.

Why is debt adjusted for taxes in WACC?

Interest expense may reduce taxable income, creating a tax shield. The standard WACC formula therefore uses the after-tax cost of debt: Rd × (1 − T).

Can two analysts calculate different WACCs for the same company?

Yes. WACC depends on assumptions about beta, the risk-free rate, equity risk premium, borrowing cost, tax treatment and capital structure. Different reasonable assumptions can produce different results. The calculation should therefore be understood as an estimate rather than a directly observable market price.

Important Limitation

A WACC calculation is only as reliable as the assumptions entered into it. The calculator performs the mathematical weighting of capital costs; it does not determine whether a particular cost of equity, borrowing rate, tax rate or capital structure assumption is appropriate for a specific company.

This calculator is provided for educational and analytical purposes and does not constitute investment, tax or financial advice.