WACC Calculator

What WACC measures

A company funds itself with a mix of equity from owners and debt from lenders, and each source has a price. Shareholders expect a return on the money they leave in the business, and lenders charge interest. The weighted average cost of capital (WACC) blends those two prices, weighting each by how much of the funding it supplies.

In effect it is the break-even return on the company's assets: earn less than this and the owners and lenders who supplied the money are not getting what they require. Finance teams use it as a hurdle rate for projects and as the discount rate when valuing future cash flows.

WACC is a model-based estimate that depends heavily on the inputs you choose. It is not investment advice. See the disclaimer.

How to use the calculator

• Equity amount: the value of the company's equity, ideally its market capitalisation.
• Cost of equity: the annual return shareholders require, as a percentage.
• Debt amount: the value of interest-bearing debt.
• Cost of debt: the interest rate the company pays on that borrowing before tax, plus any fixed charges for arranging it.
• Corporate tax rate: the rate that applies to profit. Interest is tax-deductible, so debt costs less after tax.

The result is shown as a percentage with three decimals. The equity and debt amounts must be at least 1, and the three rates cannot be negative.

The WACC formula

WACC = E ÷ (E + D) × Re + D ÷ (E + D) × Rd × (1 − T)E is equity, D is debt, Re the cost of equity, Rd the pre-tax cost of debt and T the tax rate, as a decimal.

The fractions E ÷ (E + D) and D ÷ (E + D) are the weights of equity and debt in total capital, and they always add up to 1. The factor (1 − T) reduces the cost of debt to its after-tax value, which is the tax shield on interest.

Worked example

A company has $9,000,000 of equity costing 11.5% and $3,000,000 of debt at 6%, and it pays 24% tax.

1. Total capital is 9,000,000 + 3,000,000 = $12,000,000. The weights are 75% equity and 25% debt.
2. Equity contributes 0.75 × 11.5% = 8.625%.
3. After-tax cost of debt is 6% × (1 − 0.24) = 4.56%, and debt contributes 0.25 × 4.56% = 1.14%.
4. WACC = 8.625% + 1.14% = 9.765%.

Without the tax shield (a tax rate of 0) the debt term would be 0.25 × 6% = 1.5% and the WACC would be 10.125%, so deductible interest lowers the blended cost by about 0.36 percentage points here.

Choosing the cost of equity and cost of debt

The cost of debt is easy to observe: use the current yield or borrowing rate on the company's debt, not the coupon on bonds issued years ago. The cost of equity cannot be read from a statement, so it is estimated. A common method is the capital asset pricing model:

cost of equity = risk-free rate + beta × equity risk premium

For instance, a risk-free rate of 4%, a beta of 1.2 and a premium of 5.5% give 4 + 1.2 × 5.5 = 10.6%. Using that figure with 10.6% equity and 7% debt at a 30% tax rate, a 50/50 capital mix gives a WACC of 7.75%, while an 80/20 mix gives 9.46%. More debt lowers WACC when the rates stay fixed, but in practice lenders and shareholders both demand more as leverage rises.

Uses and limitations

• Hurdle rate. A project that earns more than the WACC adds value; one that earns less destroys it. Compare projects using the IRR calculator or the NPV calculator, discounting at the WACC.
• Returns check. A business whose return on invested capital sits above its WACC is creating value; see the ROIC calculator.
• Market versus book values. Weights should use market values where possible. Book values can misstate the real mix, especially for companies whose shares trade far from book value.
• Other sources of capital. This calculator covers equity and debt only. Preferred shares and other instruments would add further terms.
• Marginal rates. The tax rate should be the one that applies to the interest deduction, which may differ from the average rate in the accounts.
• A single risk level. One WACC fits projects that resemble the existing business. Riskier ventures deserve a higher rate.