What this calculator does
WACC is the blended return a company must earn to satisfy everyone who funds it. Lenders want interest, shareholders want a return for the risk they carry, and the weighted average of the two is the hurdle any new project has to clear.
Debt looks cheap in the calculation partly because interest is tax deductible. A 6 per cent cost of debt at a 25 per cent tax rate costs the company only 4.50 per cent after tax, which is why adding debt pulls the WACC down: from 11.0 per cent with no debt to 9.05 per cent at 30 per cent gearing.
The formula
Each source of capital is weighted by its share of total market value. The equity share is multiplied by the cost of equity, the debt share by the after-tax cost of debt, and the two are added.
| Term | Meaning |
|---|---|
| Cost of equity | The return shareholders require, often estimated with CAPM. |
| After-tax cost of debt | The interest rate reduced by the tax deduction it generates. |
| Capital weights | Each source as a share of total market value, not book value. |
The inputs explained
| Field | What to enter |
|---|---|
| Market value of equity ($) | Market value of equity, which for a listed company is share price times shares outstanding. |
| Market value of debt ($) | Market value of debt. Book value is usually an acceptable approximation. |
| Cost of equity (%) | The required return on equity, as a percentage. |
| Cost of debt (pre-tax) (%) | The pre-tax interest rate on debt. |
| Corporate tax rate (%) | The corporate tax rate, which creates the deductibility benefit. |
When to use it
Setting a hurdle rate
A project earning less than WACC destroys value even if it shows an accounting profit.
Discounting a valuation
WACC is the standard discount rate for free cash flow to the whole firm.
Assessing a change in gearing
Varying the debt share shows how the blended cost moves as the capital structure changes.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does gearing change the cost of capital?
The same total capital split three ways between debt and equity.
Questions
If debt lowers WACC, why not use only debt?
Because the calculation holds the cost of equity fixed, which reality does not. As gearing rises, both lenders and shareholders demand more for the increased risk, so the costs rise and the benefit eventually reverses.
Should market or book values be used?
Market values, since WACC is about what capital costs today rather than what it cost historically. Book value of debt is usually close enough, but book value of equity often is not.
Why does tax enter the calculation?
Because interest is deductible against taxable profit while dividends are not. That deduction is a genuine cash benefit, so the effective cost of debt is the interest rate less the tax it saves.
Can WACC be used for any project?
Only for projects with risk similar to the company overall. A materially riskier venture needs a higher discount rate, otherwise the company's average understates what that particular project should be required to earn.
For estimating the cost of equity that feeds in, see the CAPM calculator. For the leverage that sets the weights, see the leverage ratios calculator.