Weighted Average Cost of Capital Calculator

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Reviewed by: Dr. Elias Vance, CFA, Valuation Expert
Dr. Vance is a Chartered Financial Analyst (CFA) with extensive experience in corporate valuation, capital budgeting, and financial risk assessment for M&A transactions.

The **Weighted Average Cost of Capital Calculator** (WACC) determines the blended cost of financing a company’s assets, representing the minimum return a company must earn on existing asset base to satisfy its creditors and shareholders. To use this calculator, you must provide the Cost of Debt and Tax Rate, then **input any three of the four core variables** (WACC, Equity Value, Debt Value, or Cost of Equity) to solve for the missing one.

WACC Calculator (Weighted Average Cost of Capital)

WACC Result (I, %):

Market Value of Equity (E, \$):

Market Value of Debt (D, \$):

Cost of Equity (Re, %):

Cost of Debt (Rd, %):

Corporate Tax Rate (T, %):

WACC Core Formula and Components

The WACC formula is composed of the weighted average of the cost of equity (Re) and the after-tax cost of debt (Rd):

$$ WACC = \left( \frac{E}{V} \times R_e \right) + \left( \frac{D}{V} \times R_d \times (1-T) \right) $$ $$ V = E + D $$

Formula Source: Investopedia: Weighted Average Cost of Capital

Variables Explained

The WACC calculation relies on finding the costs and weights of all capital sources:

WACC (I): The final calculated WACC, expressed as a required percentage return.
Market Value of Equity (E): The total market value of all outstanding shares (Share Price $\times$ Shares Outstanding).
Market Value of Debt (D): The total market value of the company’s interest-bearing debt (bonds, loans).
Cost of Equity ($R_e$): The return required by equity investors (often calculated using CAPM).
Cost of Debt ($R_d$): The current market interest rate on new debt.
Tax Rate (T): The company’s marginal or effective corporate tax rate.

Related Calculators

Use these related tools for deeper financial valuation and capital structure analysis:

What is the Weighted Average Cost of Capital (WACC)?

The **Weighted Average Cost of Capital (WACC)** represents the average rate of return a company expects to pay to all its security holders (both debt holders and equity shareholders). It is widely used in corporate finance to discount future cash flows when determining the net present value (NPV) of new projects, mergers, or acquisitions. It is essentially the hurdle rate—the minimum rate of return a company must earn on an investment to create value for its owners.

WACC is a weighted average because it factors in the proportion of debt and equity used to finance the company. Crucially, the cost of debt is adjusted downward by the corporate tax rate because interest payments are generally tax-deductible, creating a “tax shield” benefit that lowers the overall cost of capital.

How to Calculate WACC (Example)

Gather Capital Data:
A company has **Equity (E)** of **\$8 million** and **Debt (D)** of **\$2 million**. Total Value ($V$) is **\$10 million**. The **Cost of Equity ($R_e$)** is **10%**, the **Cost of Debt ($R_d$)** is **7%**, and the **Tax Rate (T)** is **25%**.
Calculate After-Tax Cost of Debt:
After-Tax $R_d = 7\% \times (1 – 0.25) = 5.25\%$.
Determine Capital Weights:
Weight of Equity ($W_e$) is $8M / 10M = 80\%$. Weight of Debt ($W_d$) is $2M / 10M = 20\%$.
Apply the WACC Formula:
$$ WACC = (0.80 \times 10.00\%) + (0.20 \times 5.25\%) $$
Determine the WACC:
The WACC is $8.00\% + 1.05\% = \mathbf{9.05\%}$. This is the minimum return the company must achieve.

Frequently Asked Questions (FAQ)

Q: Why is the Cost of Debt multiplied by (1 – Tax Rate)?

A: Interest expense on debt is tax-deductible. The tax shield means the company effectively pays less for debt financing. Multiplying by $(1-T)$ accounts for this benefit, giving the true *after-tax* cost.

Q: What is the primary use of WACC?

A: WACC is primarily used as the discount rate in Discounted Cash Flow (DCF) analysis to calculate the Net Present Value (NPV) of future projects. If a project’s expected return is greater than the WACC, it should create value for shareholders.

Q: Does WACC use book values or market values?

A: It is critical that WACC uses **market values** for both Debt (D) and Equity (E). Market values reflect the current cost of capital, whereas book values (accounting values) may be outdated and misleading.

Q: How does leverage affect WACC?

A: Because debt is typically cheaper than equity (due to the tax shield), increasing the proportion of debt (leverage) initially lowers the WACC. However, too much debt increases financial risk, raising both $R_d$ and $R_e$, which eventually causes WACC to rise again.

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