WACC Calculator
Blended cost of capital from equity and debt weights, costs, and the tax shield.
What it does
The weighted average cost of capital (WACC) is the blended return a company's investors demand: shareholders want one thing, lenders another, and WACC mixes them by the value of each. It is the discount rate behind most company-level net present value work.
The formula is two products added: equity's share of capital times its cost, plus debt's share times its after-tax cost. The tax subtraction is the point people miss: interest is deductible, so the government effectively pays part of every interest bill, while dividends get no such treatment.
Weights should come from market values, not book values. A firm's original borrowing at old rates says little about what capital costs today, and book equity ignores everything the market has learned since.
Use WACC to discount projects of average risk. A safe project deserves a lower rate, a venture-style gamble a higher one, which is why divisional or project-specific costs of capital exist.
How to use
- Enter the market value of equity.
- Enter the market value of debt.
- Enter the cost of equity, often from CAPM.
- Enter the pre-tax cost of debt (borrowing yield).
- Enter the marginal tax rate.
- Read WACC, the weights, and the after-tax debt cost.
Formula
- E
- Market value of equity.
- D
- Market value of debt.
- Re
- Cost of equity, typically from CAPM.
- Rd
- Pre-tax cost of debt: the yield or borrowing rate, not the coupon.
- tax
- Marginal corporate tax rate.
Interest is tax-deductible, so debt enters after tax while equity does not. Market values keep the weights honest, and a target capital structure beats a stale balance sheet for long-run discount rates. The framework follows standard corporate finance teaching, including MIT's finance courses and Damodaran's valuation text.
Worked example
Example: 600 equity, 400 debt, 12 %, 7 %, 25 % tax
Defaults: market equity 600, debt 400, Re 12 %, Rd 7 %, tax 25 %.
- V = 600 + 400 = 1,000; weights 60 % equity, 40 % debt.
- After-tax debt: 7 x (1 - 0.25) = 5.25 %.
- WACC = 0.6 x 12 + 0.4 x 5.25.
- = 7.2 + 2.1 = 9.3 %.
- Tool shows 9.3 %, 60 % equity, 40 % debt, 5.25 % after-tax debt.
Reference table
| Equity share | Debt share | After-tax debt | WACC |
|---|---|---|---|
| 100 % | 0 % | 5.25 % | 12.00 % |
| 80 % | 20 % | 5.25 % | 10.65 % |
| 60 % | 40 % | 5.25 % | 9.30 % |
| 40 % | 60 % | 5.25 % | 7.95 % |
| 20 % | 80 % | 5.25 % | 6.60 % |
Limits
- A constant capital structure and constant costs are assumed; both drift in reality.
- Applies to average-risk projects at the company level, not to a single risky bet.
- Tax effects are simplified to one marginal rate; credits and interest limits distort.
- Weights from market values; book values distort, especially with old low-rate debt.
Common mistakes
- Using book values for equity and debt.
- Plugging the coupon rate in as the cost of debt when the firm borrows at a different yield.
- Forgetting the tax shield entirely and overdiscounting.
- Applying one WACC to projects of very different risk.
- Mixing market equity with book debt in the same calculation.
Try it yourself
Quick checks. Answers sit tucked under each question.
MIT example: E 75, D 25, Re 12 %, Rd 7 %, tax 40 %?
WACC 10.05 %, the figure from the MIT lecture.
E 800, D 200, Re 10 %, Rd 5 %, tax 25 %?
8.75 %: after-tax debt 3.75 %, weights 80/20.
Same 600/400 mix but the tax rate is 0?
10.00 %; the shield's 0.7 points disappear.
Questions
What does WACC tell you?
The blended return capital providers require. Discounting cash flows at WACC and getting a positive NPV means the project creates value above its cost of capital.
Why is debt cheaper than equity?
Lenders accept lower returns because they take less risk, and interest is tax-deductible. Both effects push the after-tax cost of debt well under the cost of equity.
Where does the cost of equity come from?
Usually CAPM: risk-free rate plus beta times the market risk premium. For private firms, comparable company betas and size premia stand in.
Market or book values for weights?
Market values. Weights should reflect today's capital costs; book values, especially old debt, distort the mix badly.
Can WACC be too low to trust?
Heavy cheap debt lowers WACC on paper until distress risk spikes both Rd and Re. The formula is linear; reality bends near the edge.
One WACC for all projects?
Only for average-risk projects. Different divisions or bets need risk-adjusted discount rates, or the math quietly funds the wrong things.
Sources
- MIT OCW 15.402: Finance Theory II, Lecture 14, Cost of Capital (PDF)
- Penn State EME 801: Weighted Average Cost of Capital
- Aswath Damodaran: Investment Valuation, Chapter 8 (PDF)