WACC Calculator
A company with $70 million in equity, $30 million in debt, a 10% cost of equity, and a 5% cost of debt has a WACC of about 8.19% after a 21% tax rate. This WACC calculator finds the weighted average cost of capital from the market value of equity, the market value of debt, the cost of each, and the tax rate. Enter your numbers to see the equity weight, the debt weight, the after-tax cost of debt, and the blended WACC.
Quick answer
WACC blends the cost of equity and the after-tax cost of debt, weighted by each source's share of total capital.
What this tells you
- •WACC blends the cost of equity and the after-tax cost of debt, weighted by each source's share of total capital.
- •Interest on debt is tax deductible, so the cost of debt gets multiplied by (1 minus the tax rate) before it enters the blend.
- •A lower WACC means cheaper capital, which raises the present value of a company's future cash flows.
How to Use
- 1Enter the market value of equity, often the market capitalization for a public company.
- 2Enter the market value of debt, using the market value of outstanding debt or book value as a close estimate.
- 3Enter the cost of equity as a percent, often estimated with a model like CAPM.
- 4Enter the cost of debt as a percent, using the average interest rate on outstanding debt.
- 5Enter the effective tax rate as a percent.
- 6Calculate to see the equity weight, debt weight, after-tax cost of debt, and the blended WACC.
How It Works
Formula
WACC = E/(E+D) x Re + D/(E+D) x Rd x (1 - Tax)E is the market value of equity and D is the market value of debt, so E+D equals total capital. Each source's weight is its share of total capital. Cost of equity (Re) enters the blend at its full rate. Cost of debt (Rd) gets discounted by (1 minus the tax rate) because interest payments lower a company's taxable income and create a tax shield. Adding the two weighted rates gives the blended cost of financing the company's assets.
Calculation note: values are processed in the order shown above, using the current input units.
Worked Examples
$70 million equity, $30 million debt, 21% tax rate
Equity is 70% of the $100 million capital base and debt is 30%. The after-tax cost of debt is 5% x (1 - 0.21) = 3.95%. Adding 70% x 10% and 30% x 3.95% gives a WACC of about 8.19%.
$600,000 equity, $400,000 debt, 25% tax rate
Equity is 60% of the $1,000,000 capital base and debt is 40%. The after-tax cost of debt is 6% x (1 - 0.25) = 4.5%. Adding 60% x 12% and 40% x 4.5% gives a WACC of exactly 9%.
WACC at Different Debt Weights
How WACC shifts as debt makes up a larger share of capital, holding a 10% cost of equity, a 5% cost of debt, and a 21% tax rate constant.
| Debt Weight | Equity Weight | WACC |
|---|---|---|
| 0% | 100% | 10.00% |
| 20% | 80% | 8.79% |
| 40% | 60% | 7.58% |
| 60% | 40% | 6.37% |
| 80% | 20% | 5.16% |
Adding cheaper, tax-advantaged debt lowers WACC up to a point, but more debt also raises financial risk, which real-world cost of equity and cost of debt figures would reflect.
Why WACC Matters for Valuation and Capital Budgeting
WACC is commonly used as the discount rate in a discounted cash flow valuation, where future free cash flows get converted to a present value. A lower WACC produces a higher present value for the same cash flows, so small changes in the cost of equity, cost of debt, or capital structure can move a valuation by a meaningful amount.
WACC also works as a hurdle rate for capital budgeting decisions. A project or investment is expected to earn more than the company's WACC before it adds value, since WACC represents the blended return that equity and debt holders require for supplying capital to the business.
Common mistakes
- Using book value of equity instead of market value, which can differ a lot from market capitalization for a public company
- Applying the tax shield to the cost of equity instead of only to the cost of debt
- Entering the tax rate or cost figures as decimals instead of whole-number percentages, which throws off the blend
- Mixing a pretax cost of debt from one period with a cost of equity estimated for a different period or risk profile