WACC Calculator
Weighted Average Cost of Capital in seconds: combine the cost of equity, the after-tax cost of debt and (optionally) preferred stock into the single discount rate companies use to value projects and investments.
- WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate) — each funding source weighted by its market value.
- Worked example: $600 equity at 10% and $400 debt at 6% with 25% tax gives WACC 7.80%.
- Debt looks cheaper after tax because interest is tax-deductible — that tax shield is already in the formula.
Calculate WACC
Enter market values and component costs.
Advanced options — CAPM cost of equity & preferred stock
Fill all three CAPM fields to replace the cost of equity above with Rf + β × (Rm − Rf). Leave them blank to use your own cost of equity.
The main result already includes the tax shield on debt (after-tax cost of debt) with its defaults — open Advanced options only to estimate the cost of equity with CAPM or to add preferred stock.
Key takeaways
- WACC weights each funding source by market value, not book value. $600 equity + $400 debt means 60% equity, 40% debt — regardless of what the balance sheet originally recorded.
- Debt enters after tax. At 6% pre-tax and 25% tax, debt costs 4.50% — the tax shield saves 1.50 points.
- Baseline example: 7.80%. 60% × 10% equity + 40% × 4.50% after-tax debt = 6.00 + 1.80 = 7.80%.
- CAPM estimates the cost of equity as risk-free rate + beta × market premium: 3% + 1.2 × (10% − 3%) = 11.40%, lifting the same WACC to 8.64%.
- WACC is the hurdle rate: a project earning above it creates value; below it, it destroys value — if the capital structure stays roughly constant.
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WACC Explained: Formula, Cost of Capital, and Worked ExamplesThe weighted average cost of capital: what it measures, how the cost of equity and the after-tax cost of debt combine, where the inputs come
The WACC formula
A company is funded by a mix of equity, debt and sometimes preferred stock. Each source has its own required return, and WACC blends them by weight:
WACC = (E/V) × Ke + (D/V) × Kd × (1 − Tc) + (P/V) × Kp
where E, D and P are the market values of equity, debt and preferred stock, V = E + D + P is total capital, Ke is the cost of equity, Kd the pre-tax cost of debt, Tc the corporate tax rate, and Kp the cost of preferred stock. The (1 − Tc) term is the tax shield: interest is tax-deductible, so debt is cheaper after tax than its headline rate.
Worked examples
Example 1 — the baseline: E = $600, D = $400, Ke = 10%, Kd = 6%, tax = 25%. Weights are 60% and 40%. After-tax debt cost = 6% × 0.75 = 4.50%. WACC = 0.60 × 10% + 0.40 × 4.50% = 6.00% + 1.80% = 7.80%.
Example 2 — CAPM equity: with a 3% risk-free rate, beta 1.2 and a 10% expected market return, Ke = 3% + 1.2 × 7% = 11.40%. The same capital structure then gives WACC = 0.60 × 11.40% + 0.40 × 4.50% = 8.64%.
Example 3 — with preferred stock: E = $500, D = $300, P = $200, Ke = 10%, Kd = 6%, Kp = 8%, tax = 25%. WACC = 0.50 × 10% + 0.30 × 4.50% + 0.20 × 8% = 5.00% + 1.35% + 1.60% = 7.95%.
CAPM and the cost of equity
Equity has no promised coupon, so its cost must be estimated. The Capital Asset Pricing Model says investors demand the risk-free return plus a premium for market risk:
Ke = Rf + β × (Rm − Rf)
Beta measures how much the stock moves with the market: β = 1 moves with it, β > 1 amplifies it, β < 1 dampens it. A negative beta (rare) would imply a cost of equity below the risk-free rate. CAPM is the most common estimator, but it is still an estimate — betas drift, and the “expected market return” is a forecast, not a fact. This calculator’s Advanced options run CAPM only when you fill all three fields; otherwise it uses your own cost of equity.
Why market values, not book values
Book values record what was paid historically; market values record what investors would pay today. Since WACC prices new capital, market weights are the right ones. Equity’s market value is share price × shares outstanding. Debt’s market value is harder to observe (bonds trade, loans do not), so book value of debt is often used as a practical stand-in — note the approximation if you do.
What WACC is used for
WACC is the discount rate in a discounted cash flow (DCF) valuation: future free cash flows are discounted at WACC to get enterprise value. It is also the hurdle rate for projects — accept projects returning more than WACC, reject those returning less — and the yardstick for economic profit (returns above WACC create value). If a project’s risk differs sharply from the company’s average, a project-specific rate beats the company WACC.
Limits and mistakes
- Constant structure assumed: WACC assumes the debt/equity mix stays fixed. A project funded entirely with debt still gets judged at the blended rate.
- Book-value weights understate equity when shares have risen — the commonest WACC error.
- Forgetting the tax shield overstates the cost of debt by the full tax rate.
- Stale betas or risk-free rates quietly move the answer by whole percentage points — refresh them for every valuation.
- Using WACC for the wrong risk: a safe cost-saving project and a speculative expansion do not share a discount rate.
How it works
Three steps, no sign-up.
Equity and debt at market value — the weights follow automatically.
Cost of equity and pre-tax cost of debt, plus the tax rate for the debt shield.
Estimate equity cost with CAPM, or add preferred stock to the mix.
New guide: WACC Explained: Formula, Cost of Capital, and Worked Examples
The weighted average cost of capital, WACC, is the average rate a company pays for the money it uses, weighted by how much of that money comes from shareholders and how much from lenders.
WACC = (equity ÷ total capital × cost of equity) + (debt ÷ total capital × cost of debt × (1 − tax rate)). Debt is cheaper after tax because interest is tax-deductible; equity is usually more expensive because shareholders bear more risk. The full guide, WACC Explained: Formula, Cost of Capital, and Worked Examples, works through the method in detail, with worked examples and the cases that most often go wrong.
Frequently asked questions
Straight answers, with worked examples.
What is WACC?
The weighted average cost of capital: each funding source’s required return, weighted by its share of total market value. Example: $600 equity at 10% and $400 debt at 6% after 25% tax gives 7.80%.
Why is debt cheaper after tax?
Because interest is tax-deductible. At 6% pre-tax and 25% tax, the after-tax cost is 6% × (1 − 0.25) = 4.50% — the government effectively subsidises 1.50 points.
What is CAPM in the WACC calculator?
A way to estimate the cost of equity: risk-free rate + beta × (market return − risk-free rate). With 3%, beta 1.2 and 10%, the cost of equity is 11.40%. Fill all three CAPM fields in Advanced options to use it.
Should I use book or market values for WACC?
Market values. Book values are historical costs; WACC prices new capital at today’s prices. Share price × shares outstanding gives equity’s market value.
What is WACC used for?
Mainly as the discount rate in DCF valuations and as the hurdle rate for investment decisions: projects returning above WACC create value, below it they destroy value.
Can WACC be wrong?
Yes — it assumes a constant capital structure and a single company-wide risk level. Stale betas, book-value weights, or a project far riskier than the company average all distort it.
What is WACC?
The weighted average cost of capital: the average rate a company pays for its financing, weighted by the market values of equity and debt. It is the hurdle rate for investment decisions and the discount rate for valuing the business.
Why is the cost of debt taken after tax?
Because interest payments are tax-deductible. A company paying 6% interest at a 25% tax rate keeps 25% of the interest back through lower tax, so the effective cost is 6% × 0.75, or 4.5%. The shield only has value if the company actually pays tax.
Should weights use book or market values?
Market values. They reflect what the capital is worth today and what a new investor would pay. Book values are historical and can be far from market values, especially for equity.