WACC Calculator

Understanding the WACC calculator — concept and principle

The weighted average cost of capital (WACC) is the average return a company must pay to everyone who finances it, shareholders and lenders together, weighted by how much each group provides. Analysts use it as the discount rate in a discounted cash flow (DCF) valuation and as a hurdle rate: a project that earns less than the WACC destroys value, one that earns more creates it. The calculator works with any currency, because only the ratio of equity to debt matters.

How it is calculated

WACC = E/V × Re + D/V × Rd × (1 − t), where V = E + D.

• E: market value of equity (share price × shares outstanding).
• D: market value of debt (book value is a common stand-in when bonds do not trade).
• Re: cost of equity in %, often estimated with CAPM: risk-free rate + beta × equity risk premium.
• Rd: pre-tax cost of debt in %, the yield the company would pay on new borrowing.
• t: marginal tax rate in %.

The calculator also shows the after-tax cost of debt, Rd × (1 − t), and the equity weight, E/V.

The principle

A firm is a portfolio of claims. If 60% of the money comes from shareholders who demand 11% and 40% from lenders who charge 6%, the blended price of the money is simply a weighted average. Debt gets the (1 − t) factor because interest is usually tax-deductible, so the government effectively pays part of it: this is the interest tax shield. Market values are used instead of book values because they reflect what investors would have to pay today to own the claims.

Worked example

1. V = 6,000,000 + 4,000,000 = 10,000,000, so E/V = 60% and D/V = 40%.
2. After-tax cost of debt = 6% × (1 − 0.25) = 4.5%.
3. Equity part = 0.6 × 11% = 6.6%; debt part = 0.4 × 4.5% = 1.8%.
4. WACC = 6.6% + 1.8% = 8.4%.

How to read the result

A lower WACC means cheaper financing and higher valuations for the same cash flows. Stable utilities often have low single-digit WACCs, while young technology firms can sit well above 10%. Compare a project's expected return (IRR) with the WACC, and adjust upward for projects riskier than the company's average business.

Common mistakes

• Using book equity instead of market capitalization.
• Using the coupon rate on old bonds instead of today's borrowing yield.
• Applying the tax shield when the company pays no tax (losses).
• Mixing nominal and real rates, or currencies, between cash flows and WACC.

Frequently asked questions

Why does more debt not always lower WACC?

Debt is cheaper, but more of it raises the risk to shareholders and lenders, so both Re and Rd rise. Beyond some point the higher rates offset the cheaper weight.

Should preferred stock be included?

Yes, as a third component: add P/V × Rp, with no tax adjustment because preferred dividends are usually not deductible.

Is WACC the same as the required return on a project?

Only for projects with the same risk as the firm's existing business. Riskier projects need a higher rate.

Sources: Brealey, Myers & Allen, Principles of Corporate Finance (McGraw-Hill) · Damodaran, A., Investment Valuation (Wiley)