WACC Calculator

Frequently Asked Questions

What is WACC?

Weighted Average Cost of Capital = (% Equity × Cost of Equity) + (% Debt × Cost of Debt × (1 - Tax Rate)). Represents blended return investors and lenders require. Used as DCF discount rate. Lower WACC = higher business valuation.

How do I calculate cost of equity?

CAPM: Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium. 2025 typical: 4.3% (10Y Treasury) + 1.0 × 6% = 10.3%. Beta from comparable public companies. Equity risk premium 5-7% historically. Add small-company premium (2-4%) for sub-$1B companies.

Why does WACC matter?

It's the hurdle rate for investments. Projects with returns above WACC create value; below destroy it. Affects DCF valuation directly - 1% WACC change can move valuation 15-25%. Companies optimize WACC by mixing cheap debt with equity (subject to bankruptcy risk).

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How This Calculator Works

WACC is the blended return a company must earn to satisfy all its capital providers. This tool weights each source by its share of total capital and sums them: WACC = (E÷V) × Re + (D÷V) × Rd × (1 − Tax), where E is equity value, D is debt, V = E + D, Re is cost of equity, and Rd is pre-tax cost of debt. It returns the WACC plus the equity/debt weights and the after-tax cost of debt.

Why Debt Is Multiplied by (1 − Tax)

This is the detail people miss. Interest is tax-deductible, so each dollar of interest reduces the tax bill - the government effectively subsidizes debt. A 6% pre-tax cost of debt at a 21% tax rate has a real cost of only 6% × (1 − 0.21) = 4.74%. Equity has no such shield, which is one reason a moderate amount of debt lowers WACC and why all-equity firms often have a higher cost of capital than they assume.

What WACC Is Used For

The discount rate in DCF valuation - the single input most sensitive to error in any valuation model.

The hurdle rate: a project must return more than WACC to create value. Below WACC, growth destroys shareholder value even if it is "profitable."

Capital-structure analysis: finding the debt/equity mix that minimizes the blended cost.

The Hardest Input: Cost of Equity

Cost of debt is observable (your borrowing rate); cost of equity is not. It is usually estimated via CAPM: Re = risk-free rate + β × equity risk premium - e.g. 4.5% + 1.2 × 5% = 10.5%. Small changes in beta or the risk premium swing WACC materially, so treat the result as a range, not a point. Use market values for E and D, not book values; book equity in particular can be wildly off market capitalization.

Common Mistakes

Using book values for the weights instead of market values - the most frequent and most distorting error.

Applying one company-wide WACC to every project. A riskier project needs a higher discount rate; using the firm WACC overvalues risky bets and rejects safe ones.

More leverage is not always cheaper: beyond a point, financial distress raises both Rd and Re and WACC turns back up.

Stale inputs. Risk-free rate and beta move; a WACC from two years ago can be off by several points.

WACC Calculator

Frequently Asked Questions

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