WACC Calculator
Compute the weighted average cost of capital from the value and cost of equity and debt, including the tax shield on interest.
How it works
WACC = (E ÷ V) × Re + (D ÷ V) × Rd × (1 − tax) · where V = E + D
WACC is the blended return a company must earn to satisfy every capital provider, weighting the cost of equity and the cost of debt by their market values. Interest on debt is tax-deductible, so the debt cost is multiplied by (1 − tax rate) to capture the tax shield, which is why debt usually looks cheaper than equity. WACC is the standard discount rate for valuing a whole firm’s cash flows.
Worked example
A firm with $6M equity (cost 10%) and $4M debt (pre-tax cost 6%, tax 21%) has weights of 60% and 40%. After-tax debt is 6% × 0.79 = 4.74%. WACC = 0.60 × 10% + 0.40 × 4.74% = 6.0% + 1.90% = 7.90%.
Frequently asked questions
Why is the cost of debt adjusted for tax?
Interest payments are tax-deductible, so each dollar of interest reduces the tax bill by the tax rate. The effective cost of debt is therefore the stated rate times (1 − tax rate) — the after-tax cost.
Should I use book or market values?
Market values of equity and debt, because WACC estimates the return demanded by today’s investors on today’s value. Book values can be far from market and distort the weights.
What is WACC used for?
It is the discount rate for a discounted-cash-flow valuation of the entire firm and a hurdle rate for projects. A project should generally earn more than WACC to create value.
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Educational estimate, not investment advice. Trading forex, futures and options carries substantial risk of loss.