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
- Choose whether you already know cost of equity or want to derive it with CAPM.
- Enter equity and debt weights as percentages of total capital (they need not sum to exactly 100 — the calculator normalizes).
- If using known cost of equity, enter it directly; if using CAPM, enter risk-free rate, beta, and market risk premium.
- 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. Optional CAPM mode: Cost of equity = Risk-free rate + Beta × Market risk premium.
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%. CAPM example: 4% risk-free + 1.2 × 5% market premium = 10% cost of equity.
Frequently asked questions
How do I estimate cost of equity?
Enter it directly if you already have an estimate, or switch to CAPM mode to compute Cost of equity = Risk-free rate + Beta × Market risk premium. You can also use a dividend discount or build-up approach outside this calculator and paste the result into the known-cost mode.
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.