WACC Calculator

WACC formula

This weighted average cost of capital calculator uses the standard formula for weighted average cost of capital — also written as the WACC equation or the weighted cost of capital formula:

WACC = (E / V) × Re + (D / V) × Rd × (1 − Tax)

where:

• E — market value of the firm's equity
• D — market value of the firm's debt
• V — total capital, V = E + D
• Re — cost of equity (required return for shareholders)
• Rd — pre-tax cost of debt
• Tax — effective corporate tax rate

The factor (1 − Tax) appears only on the debt side. That's the tax shield in action: interest expense reduces taxable income, so the true cost to the company is the pre-tax rate after subtracting the tax saving.

How to calculate WACC

Plug five inputs into the WACC formula and you're done. The calculator above walks through the exact arithmetic with your numbers substituted in, which is helpful when you need to show your work in a model, a class assignment, or a board memo.

A few practical notes for getting the inputs right:

• Use market values, not book values. For equity that means market cap (share price × shares outstanding). For debt, market values are harder to get; in practice analysts often use book value as a proxy, which is acceptable when the firm's credit spread hasn't changed meaningfully since issuance.
• Cost of equity (Re) is usually estimated with CAPM: Re = risk-free rate + beta × equity risk premium.
• Cost of debt (Rd) is the yield to maturity on the firm's outstanding bonds — not the coupon, which can be stale.
• Tax rate should be the firm's effective marginal rate, combining federal, state, and any other applicable taxes for the jurisdiction.

What is WACC (definition)

The WACC definition is straightforward: WACC is the blended after-tax cost that a firm pays for its long-term capital, weighted by how much of each source — equity and debt — sits on the balance sheet. It answers the question: "Across everyone who funds this business, what return are they collectively demanding?"

WACC matters because it's the hurdle rate used in valuation. In a discounted cash flow (DCF) model, future free cash flows are discounted back at WACC to get enterprise value. A project that earns less than WACC destroys value; one that earns more creates it. That makes WACC a first-order number for capital-allocation decisions inside a company, and a key input to fundamental valuation by outside investors.

Cost of equity and cost of debt explained

Cost of equity is the rate of return shareholders expect on the money they've put in. There's no contractual coupon — it's an implicit expectation embedded in the share price. The standard cost of equity formula is the Capital Asset Pricing Model: Re = Rf + β × ERP, where Rf is the risk-free rate (typically the 10-year Treasury yield), β measures the stock's sensitivity to overall market moves, and ERP is the equity risk premium (often around 5% in mature markets). If all you need is a cost of equity calculator, that CAPM formula plus the Re field above is enough on its own.

The cost of debt formula is more concrete: it's the yield to maturity that creditors currently demand to lend to the firm. For a public company with bonds outstanding, you can read the yield directly off market quotes. For a private company, a reasonable proxy is the yield on bonds from similar firms with comparable credit ratings.

The pre-tax cost of debt enters the WACC formula directly, and is multiplied by (1 − Tax) to capture the tax deductibility of interest payments. Equity returns are not tax-deductible at the corporate level, so cost of equity gets no such adjustment.

Why the tax shield matters

In most tax codes — the U.S. included — interest expense is deductible from corporate income. Every dollar paid out in interest reduces taxable profit by a dollar, which in turn lowers the tax bill by the dollar's worth of tax. The net cost of debt to the firm is therefore lower than the headline interest rate, by exactly that tax saving.

That's why the WACC formula applies (1 − Tax) only to the debt term. Equity dividends and retained earnings get no equivalent break, so the equity side enters untouched. The mechanical result is that, all else equal, raising more capital with debt can lower WACC — though in practice excessive leverage raises the cost of both debt and equity by amplifying default risk, so the effect tapers and eventually reverses.