WACC is the blended rate a business pays for the money it uses. Enter how much equity and debt you have, what each costs, and your tax rate, and the calculator returns the weighted average, along with the capital weights and the after-tax cost of debt underneath it.
If you do not have a cost of equity to hand, open the CAPM section and build one from a risk-free rate, a beta, and an equity risk premium. That is how analysts arrive at the number, and it makes the assumption visible rather than hiding it inside a single percentage.
What WACC actually measures
Every business runs on money that came from somewhere, and none of it is free. Shareholders expect a return for the risk they took. Lenders charge interest. WACC combines the two into one rate, weighted by how much of each the business uses.
That rate is the bar. A project returning more than WACC creates value. A project returning less destroys it, even when it is profitable in accounting terms, because the profit is smaller than what the capital funding it costs. This is the distinction between profitable and worthwhile, and WACC is the number that draws the line.
It is also, for most companies, the discount rate. Future cash flows are worth less than present ones precisely because capital has a cost, and WACC is the honest estimate of that cost.
The WACC formula
WACC = (E ÷ (E + D)) × Ce + (D ÷ (E + D)) × Cd × (1 − T)
Where E is equity, D is debt, Ce is the cost of equity, Cd is the cost of debt before tax, and T is the corporate tax rate.
Read structurally, it is simpler than it looks. Work out what share of your capital is equity and what share is debt, multiply each by its own cost, and add them. The only complication is the last term, and it exists because interest is tax deductible while dividends are not.
Where each input comes from
Equity is the market value of the shares, not the book value on the balance sheet. For a private company, use the most recent valuation or a comparable multiple. Book equity is an accounting artefact and using it produces a WACC that describes nothing.
Debt is interest-bearing borrowing: loans, bonds, credit facilities, and the debt portion of leases. Trade payables are not debt, because they do not carry interest.
Cost of debt is the rate you would pay on new borrowing today, not the average coupon on debt raised years ago at different rates. If your outstanding bonds trade above par, your real cost of debt is below their coupon.
Cost of equity is the hardest input, because nobody sends you an invoice for it. The standard approach is the capital asset pricing model:
Cost of equity = Risk-free rate + Beta × Equity risk premium
The risk-free rate is a government bond yield of matching duration. Beta measures how much the shares move relative to the market, so a beta of 1.2 means the stock is 20% more volatile than the index. The equity risk premium is the extra return investors demand for holding equities at all. Every one of those is an estimate, which is why the CAPM section in the calculator shows the pieces rather than a single confident number.
Tax rate should be the marginal rate at which interest is actually deductible, not the headline statutory rate and not the effective rate from last year's accounts.
A worked example
A company has $700,000 of equity and $500,000 of debt. Shareholders require 15%, the debt costs 8%, and the corporate tax rate is 20%.
Total capital is $1.2m, so equity is 58.33% of the mix and debt is 41.67%.
Equity contribution = 0.5833 × 15% = 8.75%
After-tax cost of debt = 8% × (1 − 0.20) = 6.40%
Debt contribution = 0.4167 × 6.40% = 2.67%
WACC = 8.75% + 2.67% = 11.42%
So this business needs to earn more than 11.42% on anything it invests in, before the investment is worth making at all. A project returning 10% looks profitable on a spreadsheet and quietly makes the company smaller.
Why the tax shield makes debt cheaper
Interest is a deductible expense. Dividends are not. That means every dollar of interest reduces the tax bill, and the government effectively pays a share of your borrowing cost.
At an 8% interest rate and a 20% tax rate, the real cost is 6.4%. At a 25% tax rate it falls to 6.0%. The higher the tax rate, the larger the subsidy, which is why debt looks structurally cheap in high-tax jurisdictions.
This creates an obvious temptation, and an equally obvious limit. Adding debt lowers WACC at first, because you are replacing expensive equity with cheap, tax-favoured debt. Past a point it reverses. Lenders demand higher rates as leverage rises, shareholders demand more too because their claim is riskier, and the probability of financial distress starts carrying its own cost. WACC is U-shaped against leverage, and the bottom of that curve is what people mean by an optimal capital structure.
The practical consequence is that a low WACC is not automatically good news. A company can drive its WACC down with leverage right up to the point where it cannot service the debt.
What WACC is actually used for
As a discount rate in valuation. Discounted cash flow models discount future free cash flow at WACC to get present value. Change WACC by a point and the valuation moves substantially, which is why the input deserves more scrutiny than it usually gets.
As a hurdle rate for investment. Capital projects are approved when the expected internal rate of return clears WACC by an agreed margin.
As the benchmark for return on invested capital. ROIC above WACC means the business creates value. ROIC below WACC means it consumes it, and the wider the gap, the faster.
As an input to economic profit. Invested capital multiplied by the spread between ROIC and WACC gives the value created in a period, which is a far better performance measure than accounting profit.
Where WACC misleads
It applies one rate to unlike projects. A safe capacity expansion and a speculative new market do not carry the same risk, and discounting both at the company average overvalues the risky one and undervalues the safe one. Serious capital allocators adjust the rate by project.
Cost of equity is an estimate wearing the clothes of a fact. Beta depends on the period and index you measure it against. The equity risk premium is genuinely contested among people who do this for a living. Small differences in either move WACC by more than a point.
Book values corrupt the weights. Using balance sheet equity instead of market value is the single most common error, and it can shift WACC by several points in either direction.
It assumes the capital structure holds. A company planning to pay down debt or raise equity will not have today's weights for long, and the WACC used to value it should reflect where the structure is going.
It is backward looking on debt. Rates move. A cost of capital built on borrowing arranged in a different rate environment describes history rather than the decision in front of you.
How operators actually use the hurdle rate
Calculate it once a year, and after any material financing event. WACC is not a daily number, but a large raise, a refinancing, or a sharp move in rates makes the old one wrong.
Set the hurdle above WACC, not at it. A project expected to return exactly the cost of capital creates nothing and consumes management attention. Most companies add a margin, often several points.
Use a range, not a point. Run the calculation at the high and low ends of your cost of equity assumption and see whether the decision changes. If it does, the decision was never as clear as the spreadsheet suggested.
Compare ROIC against it in every board pack. The spread between the two is the cleanest single measure of whether the business is worth its own capital.
Watch the leverage trade-off honestly. Cheaper capital that comes with covenants and refinancing risk is not free, and the WACC calculation will not show you the danger.
Further reading from Revenue Memo
FAQs
How do I calculate WACC?
Work out what share of your capital is equity and what share is debt, multiply each share by its own cost, and add them, reducing the debt cost by the tax relief on interest. With $700,000 of equity at 15%, $500,000 of debt at 8%, and a 20% tax rate, the result is 11.42%.
What is a good WACC?
Lower is better in isolation, but there is no target figure, because WACC reflects the risk of the business and the rate environment it operates in. A stable utility might sit near 6%, an early-stage technology company well above 15%. What matters is whether the returns the business generates exceed it.
Why is the cost of debt multiplied by one minus the tax rate?
Because interest payments are tax deductible. Every dollar of interest reduces taxable profit, so the true cost to the company is the interest less the tax it saves. At an 8% rate and 20% tax, the after-tax cost is 6.4%.
Should I use book value or market value for equity?
Market value. Book equity is an accounting figure that reflects historical transactions rather than what shareholders' claim is worth today. Using it is the most common mistake in WACC calculations and can move the answer by several percentage points.
How do I calculate the cost of equity?
The usual approach is the capital asset pricing model: the risk-free rate plus beta multiplied by the equity risk premium. With a 4.2% risk-free rate, a beta of 1.2, and a 5.5% premium, the cost of equity is 10.8%. The CAPM section in the calculator above does this for you.
Does adding debt always lower WACC?
Only up to a point. Debt is cheaper than equity and carries a tax shield, so early borrowing does reduce WACC. As leverage rises, lenders and shareholders both demand more for the added risk, and WACC starts climbing again. The curve is U-shaped.
What is the difference between WACC and the cost of equity?
The cost of equity is what shareholders alone require. WACC blends that with the after-tax cost of debt, weighted by how much of each the company uses. WACC is always the lower of the two for any company carrying debt.