Formula to Calculate Weighted Average Cost of Capital
Accurately determine your company's cost of capital with our professional WACC calculator. Understand the balance between equity and debt to make smarter investment decisions.
WACC Calculator
Total market value of the company's outstanding shares ($).
Please enter a positive number.
Total market value of the company's debt ($).
Please enter a positive number.
Expected rate of return demanded by shareholders (%).
Please enter a valid percentage (0-100).
Effective rate a company pays on its debt (%).
Please enter a valid percentage (0-100).
Applicable corporate tax rate (%).
Please enter a valid percentage (0-100).
Weighted Average Cost of Capital (WACC)
8.63%
WACC = (E/V × Re) + [D/V × Rd × (1 – T)]
Calculation Breakdown
Component
Value ($)
Weight (%)
Cost (%)
Contribution (%)
Equity
$5,000,000
71.43%
10.50%
7.50%
Debt
$2,000,000
28.57%
5.00%
1.13% (Post-Tax)
Total (V)
$7,000,000
100%
–
8.63%
Table 1: Detailed breakdown of capital structure weights and cost contributions.
Figure 1: Visual representation of WACC components (Weighted Cost of Equity vs. Weighted Cost of Debt).
What is the Formula to Calculate Weighted Average Cost of Capital?
The formula to calculate weighted average cost of capital (WACC) is a critical financial metric that represents the average rate a company expects to pay to finance its assets. WACC is calculated by weighting the cost of each capital component—primarily equity and debt—according to its proportion in the overall capital structure.
Investors and analysts use this formula to assess the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital. If a company's return on invested capital (ROIC) exceeds its WACC, it is creating value; if it falls below, it is destroying value.
Who Should Use This?
Corporate Finance Managers: To evaluate investment projects and mergers.
Investors: To determine the fair value of a stock using Discounted Cash Flow (DCF) models.
Small Business Owners: To understand the true cost of taking on loans versus giving up equity.
WACC Formula and Mathematical Explanation
The standard formula to calculate weighted average cost of capital combines the cost of equity and the after-tax cost of debt. The mathematical expression is:
WACC = (E/V × Re) + (D/V × Rd × (1 – T))
This formula derives a blended rate based on how much the company relies on debt versus equity. Importantly, interest payments on debt are tax-deductible in many jurisdictions, which provides a "tax shield" that lowers the effective cost of debt.
Variable Definitions
Variable
Meaning
Unit
Typical Range
E
Market Value of Equity
Currency ($)
> 0
D
Market Value of Debt
Currency ($)
> 0
V
Total Market Value (E + D)
Currency ($)
Sum of E & D
Re
Cost of Equity
Percentage (%)
6% – 15%
Rd
Cost of Debt
Percentage (%)
2% – 10%
T
Corporate Tax Rate
Percentage (%)
15% – 30%
Table 2: Key variables used in the WACC calculation.
Practical Examples (Real-World Use Cases)
Example 1: A Conservative Manufacturing Firm
Consider "FabriCorp," a stable manufacturing company. They have significant assets and stable cash flows, allowing them to carry more debt.
Equity (E): $10,000,000
Debt (D): $5,000,000
Cost of Equity (Re): 8%
Cost of Debt (Rd): 4%
Tax Rate (T): 25%
Calculation:
Total Value (V) = $15,000,000.
Weight of Equity = 10/15 = 66.7%. Weight of Debt = 5/15 = 33.3%. WACC = (0.667 × 0.08) + (0.333 × 0.04 × (1 – 0.25))
= 0.0533 + 0.0100 = 6.33%
Interpretation: FabriCorp has a low WACC, meaning it can profitably invest in projects returning just 7% or more.
Example 2: A High-Growth Tech Startup
Consider "TechNova," a risky startup with no debt and high growth expectations.
Equity (E): $2,000,000
Debt (D): $0
Cost of Equity (Re): 15%
Cost of Debt (Rd): 0%
Tax Rate (T): 21%
Calculation:
Since there is no debt, the WACC is simply the cost of equity. WACC = 15%
Interpretation: TechNova has a high hurdle rate. It must find projects yielding over 15% to satisfy investors, reflecting the higher risk profile.
How to Use This WACC Calculator
Using the formula to calculate weighted average cost of capital effectively requires accurate inputs. Follow these steps:
Input Market Values: Enter the current market value of equity (Market Cap) and the market value of total debt. Do not use book values if market values are available, as market values reflect real-time investor expectations.
Determine Rates: Input the Cost of Equity (often derived from CAPM) and the Cost of Debt (interest rate on existing bonds or loans).
Adjust Tax: Enter your effective corporate tax rate. This adjusts the debt cost to reflect the tax shield benefit.
Analyze Results: The calculator provides the WACC percentage. Use the dynamic chart to visualize how much of your capital cost comes from equity versus debt.
Key Factors That Affect WACC Results
Several macroeconomic and company-specific factors influence the output of the formula to calculate weighted average cost of capital.
Interest Rates: As central bank rates rise, the Cost of Debt (Rd) increases. This also pushes up the risk-free rate used to calculate the Cost of Equity, leading to a higher overall WACC.
Corporate Tax Rate: Higher tax rates actually lower WACC because the interest tax shield becomes more valuable. The government effectively subsidizes a larger portion of the debt payments.
Capital Structure (Leverage): Adding cheaper debt to the capital structure generally lowers WACC initially. However, excessive debt increases bankruptcy risk, which eventually causes both the Cost of Debt and Cost of Equity to spike.
Market Volatility (Beta): Companies with volatile stock prices have a higher Beta, which increases the Cost of Equity via the CAPM model, resulting in a higher WACC.
Industry Sector: Utility companies typically have stable cash flows and low WACCs, while biotechnology firms have high risk and high WACCs.
Company Credit Rating: A downgrade in credit rating directly increases the interest rate lenders demand, raising the Cost of Debt component.
Frequently Asked Questions (FAQ)
Why is WACC important for valuation?
WACC is the discount rate used in Discounted Cash Flow (DCF) analysis. A lower WACC results in a higher present value of future cash flows, increasing the company's valuation.
Should I use Book Value or Market Value?
Always use Market Value for Equity and Debt when using the formula to calculate weighted average cost of capital. Market values reflect the current economic reality and what it would cost to buy the company today.
What if the company has no debt?
If a company is 100% equity-financed, its WACC is equal to its Cost of Equity. The formula simplifies to just Re.
Why is the Cost of Equity usually higher than the Cost of Debt?
Equity holders take on more risk than debt holders because they are paid last in the event of liquidation. Therefore, they demand a higher rate of return (risk premium).
Can WACC be too low?
While a low WACC is generally good, an artificially low WACC might indicate the company is taking on excessive cheap debt, which increases financial distress risk in the long run.
How does inflation affect WACC?
Inflation generally increases interest rates and the required return on equity, thereby increasing WACC.
What is the "Tax Shield"?
The tax shield refers to the reduction in income taxes that results from taking an allowable deduction from taxable income—in this case, interest payments on debt.
Is WACC constant over time?
No. WACC changes daily with stock prices, interest rates, and changes in the company's financial health.
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