Calculate the Weighted Average Cost of Capital WACC
A professional tool to calculate the weighted average cost of capital WACC for corporate finance and investment analysis.
Total market capitalization or equity value ($).
Please enter a valid positive number.
Total outstanding interest-bearing debt ($).
Please enter a valid positive number.
Expected rate of return demanded by shareholders.
Please enter a valid percentage (0-100).
Effective interest rate paid on debt.
Please enter a valid percentage (0-100).
Effective tax rate (used to calculate tax shield).
Please enter a valid percentage (0-100).
Weighted Average Cost of Capital (WACC)
0.00%
WACC = (E/V × Re) + ((D/V × Rd) × (1 – T))
Total Capital (V)
$0
After-Tax Cost of Debt
0.00%
Equity Weight (E/V)
0.00%
Debt Weight (D/V)
0.00%
Component
Value ($)
Weight (%)
Cost (%)
Weighted Cost (%)
Breakdown of capital components used to calculate the weighted average cost of capital wacc.
Figure 1: Capital Structure Composition (Equity vs. Debt)
What is "Calculate the Weighted Average Cost of Capital WACC"?
When financial analysts and business owners need to assess the minimum return required to satisfy all capital providers, they calculate the weighted average cost of capital WACC. This metric represents the average rate a company expects to pay to finance its assets, weighted by the proportion of equity and debt in its capital structure.
Essentially, WACC serves as the hurdle rate for investment decisions. If a new project or acquisition generates a return (ROIC) higher than the WACC, it creates value for shareholders. If the return is lower, it destroys value.
Investors, CFOs, and valuation experts use this calculation to:
Discount Cash Flows (DCF): Determine the present value of future cash flows in valuation models.
Evaluate Projects: Assess whether a new factory or product line is financially viable.
Performance Benchmarking: Compare a company's financing efficiency against competitors.
A common misconception is that a company only has one cost of capital. In reality, the cost fluctuates based on market conditions, leverage ratios, and tax environments. This makes it vital to accurately calculate the weighted average cost of capital wacc regularly.
WACC Formula and Mathematical Explanation
To calculate the weighted average cost of capital wacc, you must combine the cost of equity and the after-tax cost of debt, weighted by their respective shares in the total market value of the company.
WACC = (E/V × Re) + [(D/V × Rd) × (1 – T)]
Variable Definitions for WACC Calculation
Variable
Meaning
Unit
Typical Range
E
Market Value of Equity
Currency ($)
> 0
D
Market Value of Debt
Currency ($)
≥ 0
V
Total Value (E + D)
Currency ($)
> 0
Re
Cost of Equity
Percentage (%)
6% – 15%
Rd
Cost of Debt
Percentage (%)
3% – 10%
T
Corporate Tax Rate
Percentage (%)
15% – 30%
Note on the Tax Shield: You will notice the debt component is multiplied by (1 - T). This is because interest payments on debt are typically tax-deductible, effectively lowering the cost of debt financing compared to equity financing.
Practical Examples (Real-World Use Cases)
Example 1: The Stable Manufacturing Co.
A mature manufacturing company wants to calculate the weighted average cost of capital wacc to value a potential merger.
A high-growth tech startup with no debt looks to raise capital.
Equity (E): $2,000,000
Debt (D): $0
Cost of Equity (Re): 14.0% (Higher risk)
Tax Rate: 21%
Calculation:
Since Debt is 0, the weight of debt is 0%. The WACC simply equals the Cost of Equity. WACC = 14.0%.
This highlights why companies often take on debt—to lower their overall WACC through cheaper, tax-advantaged borrowing, provided they can manage the risk.
How to Use This WACC Calculator
Follow these steps to accurately calculate the weighted average cost of capital wacc using the tool above:
Input Market Values: Enter the current market value of the company's equity (Market Cap) and the market value of its debt. Do not use book values if market values are available, as WACC is a forward-looking market metric.
Input Costs: Enter the Cost of Equity (often derived via CAPM) and the pre-tax Cost of Debt (current yield to maturity on bonds).
Set Tax Rate: Input the effective marginal corporate tax rate.
Analyze Results: The tool will instantly calculate the weighted average cost of capital wacc. Review the "After-Tax Cost of Debt" to see the benefit of the tax shield.
Visualize: Use the chart to understand how much of the company's capital structure is reliant on debt versus equity.
If the WACC is 8.5%, it means the company must earn at least 8.5% on its assets to maintain its current value.
Key Factors That Affect WACC Results
Several macroeconomic and company-specific variables influence the outcome when you calculate the weighted average cost of capital wacc:
Interest Rates: As central banks raise rates, the risk-free rate increases, driving up both the cost of debt and the cost of equity.
Stock Market Volatility (Beta): A higher Beta indicates higher risk, which increases the Cost of Equity (Re) and subsequently the WACC.
Corporate Tax Rates: Higher tax rates increase the value of the tax shield (interest deductibility), effectively lowering the after-tax cost of debt and the overall WACC.
Capital Structure (Leverage): Adding debt initially lowers WACC because debt is cheaper than equity. However, excessive debt increases bankruptcy risk, eventually causing both debt and equity costs to spike.
Company Size & Liquidity: Smaller companies typically face higher liquidity risk premiums, resulting in a higher cost of capital compared to blue-chip firms.
Inflation: Inflation erodes purchasing power. Lenders and investors demand higher nominal returns to offset expected inflation, raising WACC.
Frequently Asked Questions (FAQ)
1. Why do we use market values instead of book values?
We use market values to calculate the weighted average cost of capital wacc because they reflect the current economic claim of each capital provider. Book values are historical and may not represent the true cost to buy back or service the capital today.
2. Can WACC be negative?
No. Investors require a positive return for providing capital. Even in a deflationary environment, the risk premium ensures the cost of capital remains positive.
3. How do I find the Cost of Equity?
The most common method is the Capital Asset Pricing Model (CAPM): Re = Risk-Free Rate + Beta × (Market Risk Premium). You can use our related financial tools to help estimate this.
4. What is a "good" WACC?
A "good" WACC depends on the industry. Utilities might have a WACC of 4-6% due to stable cash flows, while technology startups might have a WACC of 10-15%. Lower is generally better, as it implies cheaper funding.
5. Does WACC include preferred stock?
Yes. If a company has preferred stock, it is treated as a third component: (P/V × Rp), where P is the value of preferred stock and Rp is the cost of preferred stock.
6. How often should I calculate WACC?
It is recommended to calculate the weighted average cost of capital wacc whenever market conditions change significantly (e.g., interest rate hikes) or before making major investment decisions.
7. What is the difference between WACC and IRR?
WACC is the cost of funding, while IRR (Internal Rate of Return) is the expected return of a project. You generally invest if IRR > WACC.
8. How does the tax shield work?
Interest expenses reduce taxable income. For every dollar of interest paid, the company saves $1 × Tax Rate in taxes. This subsidy effectively lowers the cost of debt.
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