The weighted average cost of capital (WACC) represents the blended return required by all capital providers — equity investors and debt holders. It is the standard discount rate for DCF valuations and corporate NPV analysis. WACC reflects the firm's capital structure, the cost of equity, the after-tax cost of debt, and the tax shield on interest.
How to use this calculator
- Enter equity and debt weights as percentages of total capital (they need not sum to exactly 100 — the calculator normalizes).
- Input the cost of equity — from CAPM, dividend growth model, or your required return assumption.
- Enter the pre-tax cost of debt (yield on existing or new borrowing).
- Set the corporate tax rate to capture the interest tax shield.
- Use the resulting WACC as the discount rate in DCF and NPV calculators.
Formula
After-tax cost of debt = Cost of debt × (1 − Tax rate). WACC = (E/V) × Cost of equity + (D/V) × After-tax cost of debt, where E/V and D/V are normalized equity and debt weights. Weights are normalized if they do not sum to 100%.
Example
With 70% equity at 12% cost, 30% debt at 6% pre-tax cost, and a 25% tax rate: after-tax debt cost = 4.5%, WACC = 0.70 × 12% + 0.30 × 4.5% = 9.75%.
Frequently asked questions
How do I estimate cost of equity?
Common approaches: CAPM (risk-free rate + beta × market premium), dividend discount model, or build-up method for private companies. This calculator accepts your cost of equity input directly.
Should I use book or market values for weights?
Market values are preferred — market cap for equity and market value of debt. Book values can distort WACC when market prices differ materially from carrying amounts.
Why is debt cost reduced by taxes?
Interest expense is tax-deductible, so the effective cost of debt to the firm is lower than the coupon rate. The tax shield = Cost of debt × Tax rate.
When does WACC change?
WACC shifts with leverage changes, interest rate movements, equity risk premium changes, and tax rate adjustments. Recalculate WACC when capital structure or market conditions change materially.