WACC Calculator

What is WACC?

The weighted average cost of capital (WACC) is the average return a company has to pay the people who finance it: shareholders, who expect a return on equity, and lenders, who charge interest on debt. Each source is weighted by how much of the company's capital it provides. Analysts use WACC as the discount rate in a discounted cash flow (DCF) valuation and as the minimum return a typical new project should earn.

WACC formula

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

• E is the value of equity and D is the value of debt.
• Re is the cost of equity.
• Rd is the pre-tax cost of debt.
• T is the corporate tax rate.

Interest is generally tax-deductible for a corporation, so debt costs less than its interest rate. The (1 − T) term turns the pre-tax cost of debt into the after-tax cost the WACC formula uses. Equity gets no such adjustment because dividends are not deductible.

How to calculate WACC

1. Add equity and debt to get total capital, then divide each by the total to get its weight.
2. Multiply the cost of debt by (1 − tax rate).
3. Multiply each cost by its weight and add the two results.

Example: a company has $750,000 of equity with a 9.5% cost of equity and $250,000 of debt at 6%, with a 21% tax rate. The weights are 75% equity and 25% debt. The after-tax cost of debt is 6% × (1 − 0.21) = 4.74%. WACC = 0.75 × 9.5% + 0.25 × 4.74% = 7.125% + 1.185% = 8.31%.

Frequently asked questions

Should I use market value or book value in a WACC calculator?

Market value is the standard choice. For a public company, equity value is its market capitalization (share price × shares outstanding). Debt rarely trades, so book value of debt is a common stand-in, adjusted toward market value when interest rates have moved a lot since the debt was issued.

How do I find the cost of equity?

The most common method is the capital asset pricing model (CAPM): cost of equity = risk-free rate + beta × equity risk premium. With a 4% Treasury yield, a beta of 1.1, and a 5% equity risk premium, the cost of equity is 4% + 1.1 × 5% = 9.5%.

What is a good WACC?

There is no single good number. A lower WACC means the company can raise money more cheaply, which makes more projects worthwhile. Stable, low-risk businesses such as utilities tend to have lower WACCs than young or volatile companies. Compare a company's WACC with its industry and with the return on its investments.

What if the company has preferred stock?

The full formula adds a third term: the preferred stock weight times the cost of preferred stock, with no tax adjustment. This calculator covers the common two-part case of equity and debt only.

Limitations

WACC is only as good as its inputs, and the cost of equity in particular is an estimate. The formula also assumes the company keeps the same mix of debt and equity and that the new project carries about the same risk as the business as a whole. This is not investment advice.