WACC Calculator

What WACC measures

A company raises money from two places: shareholders who buy stock and lenders who buy its bonds or sign its loans. Each group expects a return. WACC, short for weighted average cost of capital, blends those two required returns into one percentage that represents the average price the company pays for money.

That single number has a job. It is the minimum return a new project, factory or acquisition has to earn before it creates value. A project that earns 12 percent when the company's WACC is 8 percent adds value; a project that earns 6 percent quietly destroys it, even if the project reports an accounting profit.

WACC is a blended rate, not a rate anyone is charged in cash. Shareholders are not paid 10 percent in cash each year, and lenders are not paid 4.74 percent. The weights and the component costs describe what the mix of capital costs the company in expectation, which is what a long term investment decision needs.

The formula, term by term

The standard form has three moving parts:

WACC = (E / V) x Re + (D / V) x Rd x (1 - Tc)

E is the market value of equity, D is the market value of debt, and V is E + D. The two ratios E/V and D/V are the capital structure weights, and they always add up to 1. Re is the cost of equity, the return shareholders require. Rd is the pre-tax interest rate on the debt, and Tc is the corporate tax rate. The term (1 - Tc) turns the pre-tax cost of debt into an after-tax cost.

Run the terms left to right and the logic is plain: the equity share of the company is charged the equity return, the debt share is charged the debt return after tax, and the two charges are added. A company funded 60 percent by equity and 40 percent by debt puts 60 percent of the weight on the more expensive source.

Building the cost of equity with CAPM

The cost of equity is the hard input, because shareholders are never handed a contract rate. The usual approach is the capital asset pricing model:

Re = Rf + beta x ERP

Rf is the risk-free rate, normally read off a long term Treasury yield from the Treasury daily yield curve page. Beta measures how much the stock has moved relative to the broad market: a beta of 1.0 tracks the market, 1.3 swings harder, 0.8 swings less. ERP is the equity risk premium, the extra return investors demand for holding stocks instead of Treasury bonds.

The numbers below are illustrative assumptions, not current market data. Using a risk-free rate of 4.2 percent, a beta of 1.1 and an equity risk premium of 5.5 percent gives Re = 4.2 + 1.1 x 5.5 = 10.25 percent. Swap in your own three inputs and the same arithmetic holds; the calculator does not ship with a live feed, so check a Treasury yield page and a current beta source before you rely on a result for a real decision.

Why the tax rate shrinks the cost of debt

Interest is deductible, which makes debt cheaper than its quoted rate. If a company pays 6 percent on its bonds and the federal corporate rate is 21 percent, the government effectively absorbs part of the interest bill. The after-tax cost of debt is 6.00 x (1 - 0.21) = 4.74 percent.

The 21 percent figure is the flat federal corporate rate set by the Tax Cuts and Jobs Act for tax years beginning after December 31, 2017. The IRS restates it in Publication 542, Corporations, which says corporations figure their tax by multiplying taxable income by 21 percent.
This flat rate comes from the Tax Cuts and Jobs Act, as explained on the IRS IRM section for corporate tax computation. That rate has not moved since 2018, but confirm it for the year you are modeling before you put it in a model.

Two adjustments are worth knowing. State corporate income taxes add to the effective rate for many companies, and interest is deductible for state tax in most states, so a combined rate changes the shield slightly. Losses change it too: a company paying no tax this year gets no immediate benefit from the deduction, which makes its true after-tax cost of debt closer to the pre-tax rate.

A worked example with a 60/40 split

Take a company with $600 million of equity and $400 million of debt, so V is $1 billion. Market values, not balance sheet book values, are the inputs. The assumed market inputs are a 4.2 percent risk-free rate, a beta of 1.1, a 5.5 percent equity risk premium, a 6.00 percent pre-tax cost of debt and a 21 percent federal tax rate.

Read the bottom of that table as a hurdle. Any project with a risk profile close to the company's existing business has to clear 8.05 percent to be worth doing. A project that returns 9 percent clears it by less than a percentage point, which is thin enough that a small error in the inputs could flip the decision.

How the weight split moves the answer

Because debt is cheaper after tax, adding debt pulls the WACC down, at least until lenders start charging more for the added risk. Hold the component costs fixed at 10.25 percent for equity and 4.74 percent for debt and move only the weights:

The pattern is linear only because the inputs are held fixed. In practice more borrowing raises both the interest rate on new debt and the beta of the stock, so the cost of each source rises as its weight grows. That feedback is why a company cannot lower its cost of capital toward zero by borrowing more, and why the weights should reflect a target structure rather than whatever the balance sheet shows on one day.

Using WACC as a discount rate

WACC shows up wherever future cash flows get discounted. In a discounted cash flow valuation, the free cash flows are discounted at WACC to estimate what the business is worth today. In capital budgeting, the same rate is the cutoff for the internal rate of return: a project whose IRR beats WACC adds value, and one that falls short does not.

The comparison only works when the risk matches. A steady utility and a young software company do not share a hurdle rate, and a company with an 8 percent WACC should not judge a risky new venture at 8 percent. Analysts often build a separate WACC for a division or a project, using the beta and capital structure of comparable pure-play companies.

Currency and inflation need to line up too. If the cash flows are nominal dollars, the WACC has to be a nominal dollar rate. Mixing a nominal discount rate with inflation-adjusted cash flows understates value, and the mistake is invisible in the arithmetic because every individual step looks fine.

Mistakes that skew a WACC

Most bad WACC numbers come from the inputs, not the formula. These are the four that show up most often:

A fifth error is subtler: treating the output as precise. Inputs like beta and the equity risk premium carry real uncertainty, and a WACC of 8.05 percent could reasonably be 7.5 percent or 8.6 percent depending on the assumptions. Present it as a range, test the decision at both ends, and the number becomes useful instead of decorative.

Finally, keep the tax rate honest about the year. The federal rate is 21 percent, state rates vary, and a company with foreign operations faces a blended rate that no single statutory figure captures. The calculator takes whatever rate you type, which is the right design: the judgment about the rate belongs to the person modeling the company, and the page shows the arithmetic that follows.