Weighted Average Cost Of Capital (WACC) Calculator

What this WACC calculator does

A company funds itself with a mixture of shareholders' money and borrowed money. Each has a cost, those costs are different, and the blend of the two is what the business has to beat before it has created anything of value.

That blend is the weighted average cost of capital. Give this calculator your cost of equity, your cost of debt, the amount of each, and your corporate tax rate, and it returns the WACC as a percentage.

It is one of the most used numbers in finance and one of the most casually produced. The formula takes about four seconds. Getting the inputs right is where all the work is, and two of them in particular catch people out: whether you use market or book values, and whether your cost of debt is before or after tax.

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How to use it

1. Cost of Equity. The return shareholders require, as a percentage. Usually estimated with the capital asset pricing model: risk free rate plus beta times the equity risk premium.
2. Total Equity. The market value of equity, meaning share price times shares outstanding. Not the book equity from the balance sheet. This matters more than people think.
3. Cost of Debt. Your pre-tax borrowing rate. The tool applies the tax relief itself, so entering an after-tax figure here taxes it twice.
4. Total Debt. Interest bearing debt, meaning loans and bonds. Trade payables are not debt for this purpose.
5. Corporate Tax Rate. The marginal rate, as a percentage.

Press Calculate. Press Reset to clear it.

The tool handles the standard two component structure. If a company also has preferred stock, that is a third weighted term at its own cost with no tax shield, and you would need to add it manually.

The formula

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

Where E is the market value of equity, D is the value of debt, V is E plus D, Re is the cost of equity, Rd is the pre-tax cost of debt, and t is the tax rate.

Read it as what it is: a weighted average, where each source of funding contributes its cost in proportion to how much of the balance sheet it represents. The only complication is that one of the two costs gets a discount, and that is the (1 − t) term.

The weights always sum to one by construction, so a company financed entirely by equity has a WACC equal to its cost of equity, and nothing else in the formula does anything.

A worked example

A company with 700,000 of equity at a 12 percent cost, 300,000 of debt at 6 percent, and a 25 percent tax rate.

Total value: 700,000 + 300,000 = 1,000,000

Weights: equity is 70 percent, debt is 30 percent

After tax cost of debt: 6% × (1 − 0.25) = 4.5 percent

WACC: (70% × 12%) + (30% × 4.5%) = 8.4% + 1.35% = 9.75 percent

So this business must earn more than 9.75 percent on what it invests to be adding value. A project returning 9 percent looks profitable in isolation and destroys value here, because the money funding it costs more than that.

Note where the WACC sits: between the 4.5 percent after tax cost of debt and the 12 percent cost of equity, and much nearer the equity end, because equity is 70 percent of the funding. The weights do most of the work.

Market values, not book values

The most common way to get a wrong WACC is to open the balance sheet, take the shareholders' equity figure, and put it in the equity box.

Book equity is an accounting record of what was contributed and retained. It says nothing about what the equity is worth today. For a profitable listed company the market value is routinely several times book, and for an asset light business it can be many times.

That gap changes the weights, and the weights are most of the answer. Suppose a company has book equity of 200,000 and market capitalisation of 700,000, with 300,000 of debt. Using book values makes equity 40 percent of funding. Using market values makes it 70 percent. Since equity is the expensive component, the book version produces a materially lower WACC, and a lower WACC makes every project and every valuation look better than it is.

The rule: use share price times shares outstanding. For a private company, use your best estimate of what the equity is worth rather than what the accounts say.

Debt is more forgiving. Book value is usually a reasonable proxy for market value unless the company's credit quality has moved sharply or its bonds trade well away from par. If it does trade away from par, use the market figure.

Why debt looks cheap, and what the tax shield is worth

Interest is generally deductible against corporate tax. Dividends are not. So borrowing reduces your tax bill in a way that raising equity does not, and the effective cost of debt is lower than the rate on the loan.

At a 6 percent borrowing rate and 25 percent tax, every 100 of interest costs 100 but saves 25 of tax, so the real cost is 75. Hence 6% × 0.75 = 4.5 percent.

What that shield is worth across tax rates, holding everything else in our example constant:

Across a realistic range of tax rates the WACC moves by about six tenths of a percentage point. Real, worth including, and not where the sensitivity lives. The cost of equity and the weights matter far more.

One condition worth stating: the shield only exists if there is taxable profit to shield. A loss making company gets no benefit from deductible interest in that year, so applying a full tax rate to its cost of debt overstates the saving.

The part the formula gets wrong on its own

Here is what happens if you take the formula literally and vary only the debt weight, leaving the cost of equity and the cost of debt where they are:

Follow that logic and the conclusion is that a company should fund itself almost entirely with debt, because every step down the table lowers its cost of capital. Which is obviously wrong, and businesses that have tried it have found out why.

The error is in holding Re and Rd constant. They do not stay constant. As a company borrows more, its equity becomes riskier, because debt holders get paid first and what is left over for shareholders becomes more volatile. So shareholders demand a higher return. Lenders, watching the same thing, eventually demand higher interest too, and at some point the risk of financial distress starts imposing real costs of its own.

This is the ground Modigliani and Miller mapped out in 1958, and the practical upshot is that the two effects mostly cancel. There is a range where the tax shield genuinely does reduce the cost of capital, and beyond it distress costs take over and the curve turns back up.

What that means for using this calculator: it prices the capital structure you actually have, accurately. It cannot tell you what your WACC would be at a different capital structure, because that would require re-estimating the cost of equity for the new level of risk. If you want to model a change in leverage, you have to unlever and relever the beta first, and that is a separate exercise.

What you do with the number

WACC has two main jobs and one common misuse.

As a discount rate. In a discounted cash flow valuation, WACC is what you discount free cash flow to the firm by, because those cash flows belong to both debt and equity holders and WACC is the blended cost of both. Small changes matter enormously here. Moving a WACC from 9.75 to 8.75 percent can move a valuation by a fifth or more, which is why the number gets argued over so much in practice.

As a hurdle rate. A project should clear the cost of the money funding it. If your WACC is 9.75 percent, an investment expected to return 9 percent is destroying value even though it is profitable in the ordinary sense.

The misuse: applying one company wide WACC to every project regardless of risk. A stable core business and a speculative new venture do not share a cost of capital, and using the company average will systematically over-invest in the risky one and under-invest in the safe one. Divisional or project specific rates are the fix.

If you want a sanity check on whatever number you produce, Damodaran publishes industry average costs of capital, updated each January, and comparing your figure against your sector's is a quick way to spot an input that has gone wrong.

Questions people ask

Should I use book or market value of equity?

Market. Share price times shares outstanding. Book equity understates the equity weight for most profitable companies and produces a WACC that is too low.

Do I enter my cost of debt before or after tax?

Before. The calculator applies the (1 minus tax rate) adjustment itself, so an after tax figure would get the relief applied twice.

How do I work out my cost of equity?

The usual route is CAPM: risk free rate plus beta times the equity risk premium. For a private company you would use a comparable listed company's beta, relevered to your own capital structure.

What if the company has no debt?

Then WACC equals the cost of equity. Enter 0 for total debt and the debt terms drop out.

What is a good WACC?

There is no universal figure. It depends on the industry, the country, the currency and the capital structure. Compare against sector averages rather than against an absolute benchmark.

Does it handle preferred stock?

No, it covers equity and debt. Preferred stock is a third weighted term at its own cost with no tax shield, and would need adding manually.

Does more debt really lower the cost of capital?

Up to a point, then no. The formula on its own says yes because it holds the cost of equity fixed, which is not how reality works. See the section above.

References

A note on sourcing. The relationship between capital structure and the cost of capital, including why the cost of equity rises with leverage, comes from Modigliani and Miller's 1958 paper and the substantial literature that followed it. Industry average costs of capital, useful for sanity checking any figure you produce, are published free and updated annually by Aswath Damodaran at NYU Stern.

1. Damodaran, A., Cost of Equity and Capital, United States, NYU Stern School of Business. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html
2. Damodaran, A., Cost of Capital Central, NYU Stern School of Business. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/wacccentral.html
3. Damodaran, A., The Cost of Capital: The Swiss Army Knife of Finance, NYU Stern School of Business. https://pages.stern.nyu.edu/~adamodar/pdfiles/papers/costofcapital.pdf
4. Modigliani, F. and Miller, M. H., The Cost of Capital, Corporation Finance and the Theory of Investment, The American Economic Review, Vol. 48, No. 3, June 1958, pp. 261 to 297.
5. OpenStax, Principles of Finance, Section 7.2, Time Value of Money Basics. https://openstax.org/books/principles-finance/pages/7-2-time-value-of-money-tvm-basics