WACC Calculator
Calculate the Weighted Average Cost of Capital for company valuation.
What this calculator does
This calculator works out the weighted average cost of capital — the blended return a business has to earn to satisfy everyone who funded it. It weights the cost of equity and the after-tax cost of debt by each one's share of total capital and returns a single percentage that acts as a hurdle rate.
The figure matters because it sets the bar. Projects expected to return more than WACC create value; those returning less consume it, however healthy their standalone margins look. In a discounted cash flow valuation, WACC is also the discount rate, which makes it the assumption that moves the answer most.
When to use it
Use it when valuing a business with a DCF, setting a minimum acceptable return for capital projects, or testing whether changing the financing mix would genuinely reduce funding costs. Corporate finance teams, equity analysts, and anyone building an acquisition model use it routinely.
It also helps a founder or owner-manager choosing between raising equity and taking on bank debt. Setting the after-tax cost of a loan next to the implied cost of giving up ownership turns an emotional decision into an arithmetic one. What WACC cannot tell you is whether a particular project is sensible — only the return it must clear to be worth doing.
Understanding the inputs
Equity value should be market capitalisation for a listed company, or the latest post-money valuation for a private one. Debt value is total interest-bearing borrowing, with book value acceptable unless bonds trade far from par. Together they set the weights.
Cost of equity normally comes from CAPM — the gilt yield as the risk-free rate, plus beta times the equity risk premium — with a size premium for smaller companies. Cost of debt should be the rate on new borrowing today, not the average coupon on legacy facilities. The tax rate is the marginal corporation tax rate: 25 percent above £250,000 of profit, 19 percent below £50,000, with marginal relief between.
How is this calculated?
WACC = (E/V x Re) + (D/V x Rd x (1 - Tc)), where E is the market value of equity, D the market value of debt, V their total, Re the cost of equity, Rd the pre-tax cost of debt, and Tc the corporation tax rate. Interest is deductible, so debt is weighted at its after-tax cost.
A worked example
Take a company with £60 million of market equity and £40 million of debt, so 60 percent equity and 40 percent debt. Cost of equity is 10 percent, cost of debt 6.5 percent, and the marginal corporation tax rate 25 percent. The after-tax cost of debt is 6.5 times 0.75, or 4.875 percent.
WACC is 0.6 times 10 plus 0.4 times 4.875, giving roughly 7.95 percent. Without the interest deduction the same structure would cost 8.6 percent, so the tax shield is worth about 65 basis points at this level of gearing. Any project this business considers needs to clear roughly 8 percent before it adds anything for shareholders.
Limitations and assumptions
WACC is a model resting on estimates, and the two biggest — beta and the equity risk premium — are genuinely contested. Two defensible sets of assumptions can produce costs of equity three percentage points apart, which in a DCF is the gap between recommending a purchase and rejecting it.
It assumes a constant capital structure, rarely true of a growing or restructuring business, and treats the cost of debt as independent of gearing when lenders reprice as borrowing rises. It ignores preference shares, convertibles, lease liabilities, and pension deficits, the last of which can be material for older UK companies. Use a sensitivity range, and for anything transactional take professional valuation advice.
Common Questions
- What is WACC in plain terms?
- The blended annual cost of every pound funding a business, weighted by how much comes from equity and how much from debt. If a company's WACC is 8 percent, any project returning less than 8 percent destroys value even if it looks profitable in isolation, because the capital it used cost more than it generated.
- Why is debt multiplied by one minus the tax rate?
- Because interest is deductible against corporation tax. A company paying 6.5 percent on debt at the 25 percent main rate has an after-tax cost of 4.875 percent, since HMRC effectively refunds a quarter of every interest pound. Dividends come out of post-tax profit and get no such relief, which is why debt appears cheaper.
- What corporation tax rate should I use?
- The main rate is 25 percent on profits above £250,000, with a small profits rate of 19 percent below £50,000 and marginal relief tapering between the two. Use the marginal rate the company expects on incremental profit. Note that the corporate interest restriction can cap deductions above £2 million of net interest expense.
- How do I find the cost of equity?
- Most analysts use CAPM: the risk-free rate plus beta times the equity risk premium. With a 4.2 percent ten-year gilt yield, a beta of 1.1, and a 5 percent premium, cost of equity comes to about 9.7 percent. Beta is the fragile input, and smaller UK companies usually need a size premium added.
- Should I use book values or market values?
- Market values. Equity means market capitalisation, not balance sheet reserves, which reflect historical accounting rather than what shareholders actually have at risk today. Book value of debt is normally an acceptable proxy unless the company's bonds trade well away from par.
- If debt is cheaper, why not fund everything with debt?
- Because leverage raises the risk of both the debt and the equity. Past a moderate level, lenders demand higher margins, covenants tighten, credit ratings slip, and the cost of potential distress outweighs the tax shield. WACC typically forms a shallow U — falling as early debt is added, then rising.
- What is a typical WACC for a UK company?
- Broadly 6 to 9 percent for large stable businesses such as utilities and consumer staples — Ofgem and Ofwat set regulated returns in a similar range — 9 to 12 percent for a typical mid-cap, and above 12 percent for smaller or highly cyclical firms. Early-stage companies are effectively all equity at well over 20 percent.
- How is WACC used in a DCF valuation?
- It is the rate used to discount unlevered free cash flows, which makes it the most sensitive input in most models. Moving from 8 to 9 percent can reduce a terminal-value-heavy valuation by 15 to 20 percent. Present a sensitivity table across a range rather than defending a single point estimate.
- Should every project use the company's WACC?
- No. WACC reflects the risk of the existing business. A stable manufacturer moving into software should discount that project at a software company's cost of capital. A single corporate hurdle rate systematically overfunds risky ventures and starves safe ones.