Capital cost analysis

WACC Calculator

Estimate the weighted average cost of capital from a company’s equity, debt, required returns, and corporate tax rate.

Capital and rate inputs

Enter the financing assumptions

WACC
Capital cost summary

Weighted financing cost

Your WACC estimate will appear here

Enter percentage costs and nonnegative equity and debt values. Equity and debt cannot both be zero.

Table of Contents

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What is WACC Calculator?

Weighted average cost of capital combines an estimated cost of equity with the after-tax cost of debt according to their shares of total financing. It is commonly used as a discount-rate starting point for cash flows that have risk and financing assumptions consistent with the business being valued.

The calculation is simple, but choosing defensible inputs is not. Market-value weights, a forward-looking cost of equity, a borrowing rate that reflects current risk and a tax rate applicable to the debt tax shield can all require professional judgment.

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How to Use This Calculator

  1. Enter cost of equity as a percentage.
  2. Enter pre-tax cost of debt and corporate tax rate as percentages.
  3. Enter equity and debt values on the same currency and valuation basis.
  4. Confirm that debt plus equity is greater than zero.
  5. Select Calculate and review the weighted percentage.

The page converts percentages to decimals, calculates E/(D+E) and D/(D+E), applies the tax adjustment only to debt, and converts the result back to percent.

Debt and equity may be entered in any currency because only their proportions matter, but both amounts must use the same currency and date. This form does not separately handle preferred stock or excess cash.

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Formula Used

WACC = [E/(D+E)]Re + [D/(D+E)]Rd(1−T).

E and D are equity and interest-bearing debt values, Re is cost of equity, Rd is pre-tax cost of debt, and T is the corporate tax rate used for the interest tax shield.

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Variables Explained

Input or termMeaning
Cost of equity ReRequired return estimated for common equity.
Cost of debt RdCurrent pre-tax borrowing cost used by the analysis.
Tax rate TAssumed corporate tax rate, entered from 0% through 100%.
Equity EEquity financing value on the chosen basis.
Debt DInterest-bearing debt value on the same basis and date.
WACCWeighted financing cost after the modeled debt tax shield.
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Worked Example

Suppose equity is 600, debt is 400, cost of equity is 10%, pre-tax debt cost is 6%, and tax is 25%. Equity weight is 0.6 and debt weight is 0.4.

WACC = 0.6×10% + 0.4×6%×(1−0.25) = 6% + 1.8% = 7.8%. The answer changes if market weights or required returns change.

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Why Use This Calculator?

WACC is usually matched with unlevered free cash flow available to all capital providers. Applying it to equity-only cash flow mixes perspectives and can misstate value.

Use nominal WACC with nominal cash flows and real WACC with real cash flows. Currency, inflation basis and forecast date should also line up. A rate estimated in one currency is not automatically suitable for cash flows in another.

Market values are generally more relevant than historical book values for weighting capital in valuation. For a public company, market capitalization can move daily; debt market value may need estimation when quoted prices are unavailable.

The current interest rate on existing debt is not always its current opportunity cost. Analysts may examine yields, credit spreads and the borrowing rate available now. Cost of equity is normally modeled because it is not an invoice or contractual coupon.

The tax benefit of interest depends on tax law, taxable income and financing policy. A statutory rate can differ from a sustainable marginal rate, and a firm unable to use deductions promptly may receive less value than the simple formula implies.

A company-wide rate can be unsuitable for a project with very different operating risk. Project appraisal may require a rate based on comparable businesses or a separately estimated risk adjustment.

WACC can change as leverage, market prices, interest rates and risk premiums change. Record the valuation date and source of each input instead of treating the percentage as permanent.

The output is not an automatic investment hurdle or promised return. Use sensitivity analysis around important inputs, especially when small changes in a discount rate materially affect a long forecast.

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Common Mistakes

  • Allowing debt and equity to both equal zero.
  • Mixing book debt with market equity without documenting the choice.
  • Using the after-tax debt rate as the input and applying the tax shield again.
  • Applying WACC to equity cash flow.
  • Mixing nominal and real assumptions.
  • Ignoring preferred stock or other material financing classes.
  • Using a company rate for a project with different risk.
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Frequently Asked Questions

Why can debt and equity not both be zero?

Their sum is the denominator of both capital weights, so no weighted rate exists when total financing is zero.

Should I use market or book values?

Valuation practice commonly favors market-consistent weights, though the choice should match the purpose and be documented.

Is cost of debt entered before tax?

Yes. This formula applies the (1−T) adjustment to the pre-tax debt cost.

Can I use different currencies for debt and equity?

Convert them to one currency and valuation date before entering amounts so their weights are meaningful.

Does a lower WACC always mean a better company?

No. It reflects input assumptions and risk; it is not a complete measure of quality or investment merit.

Can WACC discount every project?

A project with risk unlike the existing business may require a different rate.

Why should I run sensitivity analysis?

Costs, weights and tax assumptions are estimates, and valuation can be highly responsive to the chosen discount rate.

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Sources & References