WACC Calculator
Calculate the Weighted Average Cost of Capital for company valuation.
What this calculator does
This calculator computes the weighted average cost of capital — the blended return a business must 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, producing a single percentage that serves as a hurdle rate for investment decisions.
The number matters because it sets the bar. Projects expected to return more than WACC create value; projects returning less consume it, however healthy their standalone margins look. In a discounted cash flow model, WACC is also the discount rate, which makes it the input that moves the valuation most.
When to use it
Use it when valuing a company with a DCF, setting a minimum acceptable return for capital projects, or testing whether a change in financing mix would actually reduce funding costs. Corporate finance teams, analysts, and anyone building an acquisition model reach for it constantly.
It is also useful for a founder or small business owner deciding between raising equity and taking on debt. Seeing the after-tax cost of a loan next to the implied cost of giving up ownership makes an emotional decision quantitative. What WACC will not do is tell you whether a specific project is a good idea — it only tells you the return it needs to clear.
Understanding the inputs
Equity value should be market capitalization for a public company, or the most recent post-money valuation for a private one. Debt value is total interest-bearing debt at market value, though book value is a reasonable proxy unless bonds trade far from par. Together these give you the weights.
Cost of equity is normally derived from CAPM — risk-free rate plus beta times the equity risk premium — with a size premium added for smaller companies. Cost of debt should be the rate on new borrowing today, not the historical average coupon on old debt. The tax rate is the marginal rate on incremental income: 21 percent federal, or 25 to 27 percent once state taxes are included for most US companies.
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 corporate tax rate. Interest is tax-deductible, so debt is weighted at its after-tax cost.
A worked example
Take a company with $700 million of market equity and $300 million of debt, so 70 percent equity and 30 percent debt. Cost of equity is 9 percent, cost of debt is 6 percent, and the marginal tax rate is 21 percent. The after-tax cost of debt is 6 times 0.79, or 4.74 percent.
WACC is then 0.7 times 9 plus 0.3 times 4.74, which comes to roughly 7.72 percent. Without the tax shield the same structure would cost 8.10 percent, so the deductibility of interest is worth about 38 basis points here. Shifting to 50 percent debt would drop the arithmetic WACC to around 6.87 percent — but only if lenders would still charge 6 percent at that leverage, which they generally would not.
Limitations and assumptions
WACC is a model built on estimates, and the two largest — beta and the equity risk premium — are genuinely contested. Different reasonable assumptions can produce costs of equity two or three percentage points apart, which in a DCF is the difference between a buy and a sell.
It also assumes the capital structure stays constant, which is rarely true for a growing or restructuring business, and it treats cost of debt as independent of leverage when in reality lenders reprice as debt rises. Results ignore preferred stock, convertibles, operating leases, and off-balance-sheet obligations. Use a sensitivity range rather than a single figure, and for anything transactional, involve a valuation professional.
Common Questions
- What is WACC in plain terms?
- The blended annual cost of every dollar 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 on its own, because the capital it consumed cost more than it produced.
- Why is debt multiplied by one minus the tax rate?
- Because interest is tax deductible. A company paying 6 percent on debt at a 21 percent federal corporate rate has an after-tax cost of 4.74 percent, since the deduction refunds 21 percent of every interest dollar. Equity gets no such treatment — dividends are paid from after-tax profit, which is a large part of why debt looks cheaper.
- How do I find the cost of equity?
- Most people use CAPM: the risk-free rate plus beta times the equity risk premium. With a 4.3 percent ten-year Treasury, a beta of 1.2, and a 5 percent premium, cost of equity is about 10.3 percent. Beta is the fragile input — small-cap and private companies often need a size premium added on top.
- Should I use book values or market values?
- Market values, always. Equity should be market capitalization, not balance sheet book equity, which reflects historical accounting rather than what shareholders actually have at stake. For debt, book value is usually an acceptable proxy unless the company's bonds trade far from par.
- If debt is cheaper, why not fund everything with debt?
- Because leverage raises the risk of both the debt and the equity. Beyond a moderate level, lenders demand higher rates, credit ratings fall, covenants tighten, and the probability of financial distress starts to outweigh the tax shield. WACC typically forms a shallow U — falling as you add early debt, then rising.
- What is a typical WACC?
- Broadly 6 to 9 percent for large stable companies such as utilities and consumer staples, 9 to 12 percent for the typical mid-cap, and 12 to 20 percent or higher for early-stage and highly cyclical businesses. Venture-backed startups are effectively all equity with a cost of capital well above 20 percent.
- How is WACC used in a DCF valuation?
- It is the discount rate applied to unlevered free cash flows. That makes it the single most sensitive input in most models — moving WACC from 8 to 9 percent can cut a terminal-value-heavy valuation by 15 to 20 percent. Always show a sensitivity table across a range rather than defending one point estimate.
- Should every project use the company's WACC?
- No. WACC reflects the risk of the existing business. A stable manufacturer entering software should discount that project at a software company's cost of capital, not its own. Using a single corporate hurdle rate systematically overfunds risky projects and starves safe ones.
- Which tax rate should I enter?
- The marginal rate the company actually expects to pay on incremental income. The US federal statutory rate is 21 percent, but state taxes push the combined rate to roughly 25 to 27 percent for many companies, while credits and foreign structures can pull the effective rate well below 21.