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WACC Calculator

Calculate Weighted Average Cost of Capital (WACC).

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Weighted Average Cost of Capital (WACC)

8.25%

Total capital (V): $1,500,000.00

Equity Weight (E/V)

66.7%

Contributes 6.67% to WACC

Debt Weight (D/V)

33.3%

Contributes 1.58% to WACC

Cost of Equity

10.00%

Required return on equity capital.

After-Tax Cost of Debt

4.74%

Nominal debt cost 6.00% after tax shield

Capital Structure Weights

Total Capital$1.5M
  • Equity Weight$1,000,000.0066.7%
  • Debt Weight$500,000.0033.3%

WACC Calculation Steps

Weighted blend of equity and after-tax debt costs

  1. 1. Total capital and weights

    V=E+D=$1,000,000+$500,000=$1,500,000,EV=66.67%,DV=33.33%V = E + D = \$1,000,000 + \$500,000 = \$1,500,000,\quad \frac{E}{V} = 66.67\%,\quad \frac{D}{V} = 33.33\%

    Equity represents 66.67% of total capital and debt represents 33.33%.

  2. 2. After-tax cost of debt

    Rd(1−T)=6.00%×(1−21.00100)=4.74%R_d(1 - T) = 6.00\% \times \left(1 - \frac{21.00}{100}\right) = 4.74\%

    Interest tax shields reduce the effective cost of debt from 6.00% to 4.74%.

  3. 3. Weighted average cost of capital

    WACC=EVRe+DVRd(1−T)=66.67%×10.00%+33.33%×4.74%=8.25%\text{WACC} = \frac{E}{V} R_e + \frac{D}{V} R_d(1 - T) = 66.67\% \times 10.00\% + 33.33\% \times 4.74\% = 8.25\%

    The equity component contributes 6.67% and the debt component contributes 1.58%, for a WACC of 8.25%.

Report tool

What is weighted average cost of capital (WACC)?

Weighted average cost of capital (WACC) is the blended return a company must earn on its existing assets to satisfy all capital providers: equity investors and debt lenders. It represents the minimum acceptable return on new projects when those projects carry the same risk as the overall firm. WACC is the standard discount rate in discounted cash flow (DCF) valuation and capital budgeting.

Build the equity and debt inputs with the cost of equity calculator and the CAPM calculator. Apply WACC as the hurdle rate in the net present value calculator or the discounted cash flow calculator.

WACC formula

WACC weights the cost of each capital source by its share of total firm value. Debt is adjusted for the interest tax shield:

WACC=EVRe+DVRd(1−T)\text{WACC} = \frac{E}{V} R_e + \frac{D}{V} R_d (1 - T)

Where EE is market value of equity, DD is market value of debt, V=E+DV = E + D is total capital, ReR_e is cost of equity, RdR_d is cost of debt, and TT is the corporate tax rate.

Worked example

Consider a firm with $1,000,000 market equity, $500,000 market debt, 10% cost of equity, 6% cost of debt, and a 21% tax rate. Total capital is $1,500,000, so equity weight is 66.67% and debt weight is 33.33%. After-tax cost of debt is 6% × (1 - 0.21) = 4.74%.

WACC=66.67%×10%+33.33%×4.74%≈8.25%\text{WACC} = 66.67\% \times 10\% + 33.33\% \times 4.74\% \approx 8.25\%

Equity contributes 6.67 percentage points and debt contributes 1.58 percentage points, for a WACC of about 8.25%. Projects expected to return less than this rate would destroy value at the margin unless they reduce firm risk or financing costs.

How to interpret WACC in practice

  • Use WACC as the discount rate only when project risk matches the overall company risk profile.
  • Higher leverage raises equity risk and cost of equity, but the tax shield on debt partially offsets the weight increase in WACC.
  • Recalculate WACC when capital structure, credit spreads, or tax rates change materially.
  • Compare project returns to WACC using the profitability index calculator or payback tools for capital rationing decisions.

Frequently asked questions

Why is the cost of debt adjusted for taxes in WACC?
Interest on corporate debt is tax deductible in most jurisdictions. The (1 - T) factor reflects the interest tax shield, lowering the effective cost of debt below the nominal coupon or yield.
What is the difference between cost of equity and cost of debt?
Cost of debt is the yield lenders require on borrowings. Cost of equity is the return shareholders demand for bearing residual risk. Equity cost is typically higher because equity ranks behind debt in bankruptcy.
Should I use book or market values for E and D?
Market values are standard. Use market capitalization for equity and the market value of interest-bearing debt. WACC reflects investor-required returns on current market capital structure.
How do tax rate changes affect WACC?
Higher corporate tax rates increase the value of the interest tax shield, lowering after-tax cost of debt and WACC, all else equal. Lower tax rates have the opposite effect.
Can WACC be used for all projects?
Use firm WACC only when project risk matches the overall business. Divisions or projects with different business or financial risk need a project-specific discount rate, not the company-wide WACC.
Are results stored on the server?
No. All calculations run in your browser. Inputs sync to the URL so you can bookmark or share a scenario.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.