WACC Calculator
Calculate the Weighted Average Cost of Capital (WACC) — the blended rate a company pays for its equity and debt financing. WACC is the discount rate used in DCF valuation and the minimum return a company must earn to create value for shareholders.
What Is WACC?
The Weighted Average Cost of Capital (WACC) is the blended rate a company pays for the capital it uses — a mix of equity (shareholder money) and debt (borrowed money). Equity is more expensive than debt because shareholders demand a higher return for the risk they take. WACC weights both by their proportion of total capital.
WACC matters because it is the discount rate used in Discounted Cash Flow (DCF) valuation. It is also the minimum return a company must earn on its investments to create value — any project returning less than WACC destroys value, even if it is profitable in accounting terms.
WACC Formula
WACC = (E ÷ V) × Re + (D ÷ V) × Rd × (1 − T)
- E = market value of equity
- D = market value of debt
- V = E + D (total capital)
- Re = cost of equity
- Rd = cost of debt (pre-tax interest rate)
- T = corporate tax rate
The (1 − T) factor is the tax shield: interest on debt is tax-deductible, so the effective after-tax cost of debt is lower than the stated rate. This is why debt is often cheaper than equity in WACC calculations.
Worked Example
A company has $1,000,000 equity at 12% cost, $500,000 debt at 6% cost, and a 30% tax rate:
Total capital = $1,000,000 + $500,000 = $1,500,000
Equity weight = $1,000,000 ÷ $1,500,000 = 66.67%
Debt weight = $500,000 ÷ $1,500,000 = 33.33%
After-tax cost of debt = 6% × (1 − 0.30) = 4.20%
WACC = (0.6667 × 12%) + (0.3333 × 4.20%) = 8.00% + 1.40% = 9.20%
How WACC Is Used
- DCF valuation — WACC is the discount rate for future cash flows. A higher WACC means a lower valuation.
- Capital budgeting — any project returning above WACC creates value; below WACC destroys value.
- EVA calculation — Economic Value Added uses WACC as the capital charge rate.
- Capital structure decisions — companies optimize the debt/equity mix to minimize WACC.
Frequently Asked Questions
What is a good WACC?
Lower is better because it means cheaper capital and higher valuations. WACC varies by industry and country: large stable companies in developed markets often have 6–10% WACC; riskier growth companies 10–15%; companies in emerging markets 12–20%. Compare against industry peers, not an absolute number.
Why is cost of equity higher than cost of debt?
Equity investors take more risk — they are last in line for payment if the company fails. Debt holders are paid first. Because equity holders bear more risk, they demand a higher return. That is why cost of equity is typically 3–8 percentage points higher than cost of debt.
Why is the tax rate applied to debt but not equity?
Interest payments on debt are tax-deductible — the company pays tax on profit after interest, so debt interest reduces the tax bill. Dividends paid to shareholders are not tax-deductible. This tax shield makes debt cheaper than its stated interest rate, which is why the after-tax cost of debt is used in WACC.
Should I use book value or market value of debt and equity?
Market value is the correct choice because it reflects what investors are actually paying for the capital today. Book value is only a fallback when market value is not available — which is common for private companies. For listed companies, always use market value of equity (share price × shares outstanding) and market value of debt (traded debt prices or estimated from yields).
Can WACC be negative?
No. WACC cannot be negative because all its components — cost of equity, cost of debt, and weights — are non-negative. Even a company with negative earnings still has a positive cost of capital. If a calculation gives a negative WACC, there is a data error.
How do I lower WACC?
Three levers: reduce cost of equity (lower risk, better credit rating), reduce cost of debt (better credit rating, negotiate lower rates), or shift the debt/equity mix toward more debt (because debt is cheaper and tax-deductible). The third lever is easiest but increases financial risk. The optimal capital structure minimizes WACC without raising bankruptcy risk.