Skip to content
Omnikalc

WACC calculator: weighted average cost of capital

Calculate a company's weighted average cost of capital from the value and cost of its equity and debt, with the tax shield on interest.

Updated on
Your inputs
$

Value out of range

$

Value out of range

%

Value out of range

%

Value out of range

%

Value out of range

Results

WACC

7.90%

Weight of equity (E/V)
60.0%
Weight of debt (D/V)
40.0%
After-tax cost of debt
4.74%
Debt-to-equity ratio
0.67

What WACC measures

A company finances itself with two kinds of money: equity from shareholders and debt from lenders. Each has a cost. The weighted average cost of capital (WACC) blends them in proportion to how much of each the company uses. It is the minimum return a project must earn to satisfy all investors, which is why it serves as the discount rate in most corporate valuations.

The formula

  • WACC = E/V × Re + D/V × Rd × (1 − t)
  • E = market value of equity, D = market value of debt, V = E + D
  • Re = cost of equity, Rd = cost of debt, t = corporate tax rate

Worked example

A company has $600,000 of equity costing 10% and $400,000 of debt at 6%, with a 21% tax rate.

  1. Weights: equity 60%, debt 40%; debt-to-equity is 0.67.
  2. After-tax cost of debt = 6% × (1 − 0.21) = 4.74%.
  3. WACC = 0.6 × 10% + 0.4 × 4.74% = 6.00% + 1.90% = 7.90%.

Estimating each input

Input Common source
Cost of equity CAPM: risk-free rate + beta × market risk premium
Cost of debt Yield on the company’s bonds, or its borrowing rate
Tax rate 21% federal since 2018, plus state taxes, often about 25% combined
Equity value Market capitalization (share price × shares outstanding)
Debt value Market value of bonds and loans, or book value if not traded

The tax shield

Interest is tax-deductible for US companies, within the limits of section 163(j), so $1 of interest costs only $0.79 at a 21% rate. This tax shield makes debt look cheap, but more debt also raises the risk for shareholders, which pushes up the cost of equity. Beyond a point, extra debt increases WACC rather than lowering it.

How WACC is used

  • Discounted cash flow valuation: free cash flows are discounted at the WACC.
  • Capital budgeting: a project with an expected return above the WACC creates value; below, it destroys value.
  • Performance: economic value added compares return on invested capital with the WACC.

Use a project-specific rate when a project is much riskier or safer than the company’s average business, since one WACC for everything can favor risky projects.

This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.

Frequently asked questions

What is WACC?

The weighted average cost of capital: the average rate a company pays to finance itself with equity and debt, weighted by their market values. It is often used as the discount rate for its projects.

How do you calculate WACC?

WACC = E/V × cost of equity + D/V × cost of debt × (1 − tax rate). With 60% equity at 10%, 40% debt at 6% and a 21% tax rate, WACC is 7.90%.

Why is debt adjusted for taxes?

Interest is tax-deductible for companies, so each dollar of interest costs less after tax. That tax shield lowers the effective cost of debt.

Should I use book or market values?

Market values are preferred: market capitalization for equity and the market value of debt, or its book value when debt is not traded.

Was this calculator helpful?

Thanks for your feedback!

Results are estimates provided for information purposes. They do not replace professional advice.

Related calculators