Calculate Weighted Average Cost of Capital: The Balance Small Business Guide
Determine your company's true cost of funding to make smarter investment decisions.
WACC Calculator
Enter your capital structure details below.
Total value of all shares or owner's equity.
Please enter a valid positive number.
Expected return demanded by investors (e.g., 8-15%).
Total loans, bonds, and other interest-bearing debt.
Please enter a valid positive number.
Average interest rate on your loans/debt.
Your effective tax rate (used to calculate tax shield).
Weighted Average Cost of Capital (WACC)
8.05%
Total Capitalization (V):$750,000
Weight of Equity (E/V):66.7%
Weight of Debt (D/V):33.3%
After-Tax Cost of Debt:4.35%
Capital Structure Breakdown
Equity
Debt
What is WACC?
When business owners look to calculate weighted average cost of capital the balance small companies must maintain becomes evident. The Weighted Average Cost of Capital (WACC) represents the average rate a business pays to finance its assets. It is calculated by averaging the costs of all sources of capital—namely equity and debt—weighted by their respective proportions in the company's capital structure.
For small business owners and financial managers, WACC acts as the "hurdle rate." If an investment project or expansion doesn't generate a return (ROIC) higher than the WACC, it will destroy value rather than create it.
Who Should Use This Metric?
While often associated with large public corporations, small businesses benefit significantly from understanding WACC when:
Evaluating a new loan or line of credit.
Deciding whether to bring on a new equity partner.
Valuing the business for a potential sale.
WACC Formula and Mathematical Explanation
To accurately calculate weighted average cost of capital the balance small businesses must strike relies on the standard WACC formula:
WACC = (E/V × Re) + [(D/V × Rd) × (1 – T)]
This formula blends the cost of equity and the after-tax cost of debt.
Table 1: Key Variables in WACC Calculation
Variable
Meaning
Unit
Typical Range (Small Biz)
E
Market Value of Equity
Currency ($)
Varies
D
Market Value of Debt
Currency ($)
Varies
V
Total Value (E + D)
Currency ($)
Varies
Re
Cost of Equity
Percentage (%)
10% – 25%
Rd
Cost of Debt
Percentage (%)
4% – 12%
T
Corporate Tax Rate
Percentage (%)
21% (US Flat) or Variable
Note: The term "(1 – T)" represents the "tax shield." Since interest payments on debt are generally tax-deductible, the effective cost of debt is lower than the nominal interest rate.
Practical Examples (Real-World Use Cases)
Example 1: The Debt-Light Consultant
Consider a boutique consulting firm, "StrategyPro," which is mostly equity-funded.
Equity: $900,000 (Cost: 12%)
Debt: $100,000 (Interest: 6%)
Tax Rate: 21%
Because the debt portion is so small, the tax shield is minimal. The WACC will be heavily skewed toward the 12% cost of equity, resulting in a higher hurdle rate (approx 11.2%). This means StrategyPro needs high-margin projects to justify growth.
Example 2: The Capital-Intensive Manufacturer
"HeavyMetal Mfg" uses machinery financed by loans.
Equity: $500,000 (Cost: 15%)
Debt: $500,000 (Interest: 7%)
Tax Rate: 21%
Here, the calculation balances evenly. The after-tax cost of debt is $7\% \times (1 – 0.21) = 5.53\%$. Averaging 15% (Equity) and 5.53% (Debt) equally yields a WACC of roughly 10.26%. Even though their equity risk is higher, the cheap debt lowers the overall cost of capital.
How to Use This WACC Calculator
We designed this tool to help you calculate weighted average cost of capital the balance small business owners require without complex spreadsheets.
Enter Equity Value: Estimate the current market value of owner's equity. If not public, use book value or a recent valuation.
Enter Cost of Equity: This is the return you or your investors expect. For small businesses, this is often higher than public stocks due to illiquidity.
Enter Debt Value: Sum up all bank loans, credit lines, and notes payable.
Enter Cost of Debt: Check your loan agreements for the weighted average interest rate.
Enter Tax Rate: Input your effective marginal tax rate to calculate the tax shield benefit.
Reading the Result: The large percentage shown is your WACC. If you are considering an expansion that projects a 9% return, but your WACC is 11%, the project is not financially viable.
Key Factors That Affect WACC Results
Several dynamic factors influence the output when you calculate weighted average cost of capital.
Interest Rate Environment: As central banks raise rates, the Cost of Debt ($Rd$) increases, pushing WACC up.
Corporate Tax Rates: Higher taxes actually lower WACC because the tax deduction on interest payments becomes more valuable.
Market Volatility: Higher volatility increases the risk premium investors demand, raising the Cost of Equity ($Re$).
Capital Structure (Leverage): Adding more debt generally lowers WACC initially (since debt is cheaper than equity), but too much debt increases bankruptcy risk, eventually spiking the cost of both debt and equity.
Company Size: Smaller companies often have a "small stock premium" added to their cost of equity, leading to a higher WACC than large blue-chip firms.
Industry Risk: A stable utility company will have a lower WACC than a high-growth tech startup due to the predictability of cash flows.
Frequently Asked Questions (FAQ)
1. Is a higher or lower WACC better?
Generally, a lower WACC is better. A lower cost of capital means the business can profitably pursue more projects and has a higher valuation.
2. How do I estimate Cost of Equity for a private company?
It is difficult since there is no stock ticker. Owners often use the "Build-Up Method," starting with a risk-free rate (like Treasury bonds) and adding premiums for equity risk, size risk, and specific company risk.
3. Does WACC change over time?
Yes. It changes daily for public companies and should be recalculated quarterly or annually for private businesses as interest rates and debt levels fluctuate.
4. Why is debt cheaper than equity?
Debt is cheaper for two reasons: 1) Debt holders have a higher claim on assets in bankruptcy (lower risk), and 2) Interest payments are tax-deductible.
5. Can WACC be used for stock valuation?
Yes, WACC is the discount rate used in Discounted Cash Flow (DCF) analysis to determine the present value of a company.
6. What if my company has no debt?
If you have zero debt ($D=0$), your WACC is simply equal to your Cost of Equity ($Re$).
7. Should I use book value or market value?
Ideally, use market values for equity and debt to reflect the current economic reality, though book values are often used as a proxy for small private firms.
8. How does inflation impact WACC?
Inflation generally drives up interest rates and the required return on equity, thereby increasing the WACC.
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