WACC Calculator - Weighted Average Cost of Capital

WACC (Weighted Average Cost of Capital) is the average rate a company is expected to pay to finance its assets, weighted by the proportion of each capital source: equity and debt.

It is one of the most important metrics in corporate finance, used as the discount rate in DCF (Discounted Cash Flow) valuations.

The WACC Formula:

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

Where:

• E = Market value of equity
• D = Market value of debt
• V = E + D (total value of capital)
• Re = Cost of equity (required return for shareholders)
• Rd = Cost of debt (interest rate on borrowings)
• Tc = Corporate tax rate
• E / V = Equity weight (proportion funded by equity)
• D / V = Debt weight (proportion funded by debt)

Why debt is tax-adjusted:

Interest payments on debt are tax-deductible in most jurisdictions.
This creates a “tax shield” that makes the effective cost of debt lower than the stated interest rate.
The factor (1 - Tc) adjusts for this benefit.

Worked Example:

Suppose a company has:

• Market value of equity: $60 million (60% of total capital)
• Market value of debt: $40 million (40% of total capital)
• Cost of equity (Re): 10%
• Cost of debt (Rd): 5%
• Corporate tax rate (Tc): 21%

Step 1: Weighted cost of equity: 0.60 × 10% = 6.00%
Step 2: After-tax cost of debt: 5% × (1 - 0.21) = 3.95%
Step 3: Weighted cost of debt: 0.40 × 3.95% = 1.58%
Step 4: WACC = 6.00% + 1.58% = 7.58%

This means the company must earn at least 7.58% on its investments to satisfy both its shareholders and debt holders.

How to find each input:

Common corporate tax rates (2026):

The costs move with the mix. The formula makes debt look like a free lunch: it is cheaper than equity, and the tax shield makes it cheaper still. But the two costs you enter only hold at today’s capital structure. Add debt and the shareholders’ claim sits behind more lenders, so the cost of equity rises; keep going and the lenders raise their rate too. That is why WACC stops falling well before a company is all debt, and why you cannot get a lower WACC just by changing the weights in this calculator.

Interpreting WACC:

• A lower WACC means cheaper financing: the company can pursue more projects profitably.
• A higher WACC means projects need higher returns to be worthwhile.
• WACC is the hurdle rate in capital budgeting: any project with a return above WACC creates value.
• In DCF models, WACC is used to discount future free cash flows to present value.

Common mistakes:

• Using book value instead of market value for equity and debt weights.
• Using the effective tax rate instead of the marginal tax rate.
• Forgetting to tax-adjust the cost of debt.
• Using a risk-free rate that doesn’t match the cash flow currency.

When to use WACC:

• Valuing a business using DCF analysis
• Evaluating capital budgeting decisions (NPV calculations)
• Comparing financing structures
• Setting hurdle rates for new investments
• M&A analysis and deal structuring