Cost of Capital (WACC) Calculator
Use this tool to calculate your company's Weighted Average Cost of Capital (WACC). WACC represents the average rate of return a company is expected to pay to all its security holders—its investors (cost of equity) and creditors (cost of debt).
Enter the required inputs below. Ensure consistent currency units for the values of Equity and Debt, and consistent percentage units for the costs and tax rate.
Enter Capital Structure Details
Understanding WACC & Formulas
What is WACC?
WACC is a firm's average cost of capital from all sources, including common stock, preferred stock, bonds, and other debt. It is the average rate that a company expects to pay to finance its assets. WACC is often used as a discount rate for future cash flows in discounted cash flow (DCF) analysis to determine the value of a business or project.
The WACC Formula
The formula for WACC is:
WACC = (E/V * Re) + (D/V * Rd * (1 - Tc))
Where:
Re= Cost of EquityRd= Cost of Debt (Before Tax)E= Market Value of the Firm's EquityD= Market Value of the Firm's DebtV= Total Market Value of the Firm's Financing (E + D)E/V= Proportion of Equity in the Capital StructureD/V= Proportion of Debt in the Capital StructureTc= Corporate Tax Rate
This formula reflects the fact that interest payments on debt are tax-deductible, providing a "tax shield" that lowers the effective cost of debt.
WACC Calculation Examples
Click on an example to see the steps:
Example 1: Basic WACC Calculation
Scenario: A company has simple equity and debt structure.
1. Known Values:
- Market Value of Equity (E) = $1,000,000
- Market Value of Debt (D) = $500,000
- Cost of Equity (Re) = 10%
- Cost of Debt (Rd) = 5%
- Tax Rate (Tc) = 30%
2. Calculate Total Value (V): V = E + D = $1,000,000 + $500,000 = $1,500,000
3. Calculate Weights:
- E/V = $1,000,000 / $1,500,000 ≈ 0.6667
- D/V = $500,000 / $1,500,000 ≈ 0.3333
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 5% * (1 - 0.30) = 0.05 * 0.70 = 0.035 or 3.5%
5. Apply WACC Formula: WACC = (E/V * Re) + (D/V * Rd * (1 - Tc))
WACC = (0.6667 * 0.10) + (0.3333 * 0.035)
WACC ≈ 0.06667 + 0.01167 ≈ 0.07834
6. Result: WACC ≈ 7.83%
Conclusion: The company's average cost of capital is approximately 7.83%.
Example 2: Company with More Debt
Scenario: A company with a higher proportion of debt.
1. Known Values:
- Market Value of Equity (E) = $800,000
- Market Value of Debt (D) = $1,200,000
- Cost of Equity (Re) = 15%
- Cost of Debt (Rd) = 7%
- Tax Rate (Tc) = 25%
2. Calculate Total Value (V): V = E + D = $800,000 + $1,200,000 = $2,000,000
3. Calculate Weights:
- E/V = $800,000 / $2,000,000 = 0.40
- D/V = $1,200,000 / $2,000,000 = 0.60
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 7% * (1 - 0.25) = 0.07 * 0.75 = 0.0525 or 5.25%
5. Apply WACC Formula: WACC = (0.40 * 0.15) + (0.60 * 0.0525)
WACC = 0.06 + 0.0315 = 0.0915
6. Result: WACC = 9.15%
Conclusion: The WACC is 9.15%.
Example 3: Low Growth Company
Scenario: A stable, low-growth company might have lower costs of capital.
1. Known Values:
- Market Value of Equity (E) = $5,000,000
- Market Value of Debt (D) = $3,000,000
- Cost of Equity (Re) = 8%
- Cost of Debt (Rd) = 4%
- Tax Rate (Tc) = 20%
2. Calculate Total Value (V): V = E + D = $5,000,000 + $3,000,000 = $8,000,000
3. Calculate Weights:
- E/V = $5,000,000 / $8,000,000 = 0.625
- D/V = $3,000,000 / $8,000,000 = 0.375
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 4% * (1 - 0.20) = 0.04 * 0.80 = 0.032 or 3.2%
5. Apply WACC Formula: WACC = (0.625 * 0.08) + (0.375 * 0.032)
WACC = 0.05 + 0.012 = 0.062
6. Result: WACC = 6.20%
Conclusion: The WACC is relatively low at 6.20%.
Example 4: Tech Startup
Scenario: A high-growth startup with higher perceived risk.
1. Known Values:
- Market Value of Equity (E) = $2,000,000
- Market Value of Debt (D) = $100,000
- Cost of Equity (Re) = 25%
- Cost of Debt (Rd) = 9%
- Tax Rate (Tc) = 0% (Startup with no profits yet)
2. Calculate Total Value (V): V = E + D = $2,000,000 + $100,000 = $2,100,000
3. Calculate Weights:
- E/V = $2,000,000 / $2,100,000 ≈ 0.9524
- D/V = $100,000 / $2,100,000 ≈ 0.0476
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 9% * (1 - 0.00) = 0.09 * 1.00 = 0.09 or 9%
5. Apply WACC Formula: WACC = (0.9524 * 0.25) + (0.0476 * 0.09)
WACC ≈ 0.2381 + 0.0043 = 0.2424
6. Result: WACC ≈ 24.24%
Conclusion: The high cost of equity and minimal tax shield result in a high WACC.
Example 5: Using Proportion Weights Directly
Scenario: You already know the proportions of equity and debt.
1. Known Values (as Proportions and Costs):
- Equity Weight (E/V) = 70% (Input as E=$70, D=$30 for calculation)
- Debt Weight (D/V) = 30%
- Cost of Equity (Re) = 11%
- Cost of Debt (Rd) = 6%
- Tax Rate (Tc) = 35%
Note: To use the calculator with weights, enter dummy values for E and D that represent the ratio, e.g., E=70, D=30.
2. Calculate Total Value (V): V = 70 + 30 = 100
3. Weights (already known): E/V = 70/100 = 0.70, D/V = 30/100 = 0.30
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 6% * (1 - 0.35) = 0.06 * 0.65 = 0.039 or 3.9%
5. Apply WACC Formula: WACC = (0.70 * 0.11) + (0.30 * 0.039)
WACC = 0.077 + 0.0117 = 0.0887
6. Result: WACC = 8.87%
Conclusion: The WACC is 8.87%.
Example 6: Zero Debt
Scenario: A company financed purely by equity.
1. Known Values:
- Market Value of Equity (E) = $5,000,000
- Market Value of Debt (D) = $0
- Cost of Equity (Re) = 13%
- Cost of Debt (Rd) = (Irrelevant, but enter a number, e.g., 0 or 1)
- Tax Rate (Tc) = 21%
2. Calculate Total Value (V): V = E + D = $5,000,000 + $0 = $5,000,000
3. Calculate Weights:
- E/V = $5,000,000 / $5,000,000 = 1.00
- D/V = $0 / $5,000,000 = 0.00
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = (Value doesn't matter) * (1 - 0.21) = 0
5. Apply WACC Formula: WACC = (1.00 * 0.13) + (0.00 * 0)
WACC = 0.13 + 0 = 0.13
6. Result: WACC = 13.00%
Conclusion: WACC equals the Cost of Equity when there is no debt.
Example 7: Zero Tax Rate
Scenario: Calculating WACC for an entity with a 0% tax rate (e.g., non-profit, specific jurisdiction).
1. Known Values:
- Market Value of Equity (E) = $2,000,000
- Market Value of Debt (D) = $1,000,000
- Cost of Equity (Re) = 12%
- Cost of Debt (Rd) = 5%
- Tax Rate (Tc) = 0%
2. Calculate Total Value (V): V = E + D = $2,000,000 + $1,000,000 = $3,000,000
3. Calculate Weights:
- E/V = $2,000,000 / $3,000,000 ≈ 0.6667
- D/V = $1,000,000 / $3,000,000 ≈ 0.3333
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 5% * (1 - 0.00) = 0.05 * 1.00 = 0.05 or 5%
5. Apply WACC Formula: WACC = (0.6667 * 0.12) + (0.3333 * 0.05)
WACC ≈ 0.0800 + 0.0167 ≈ 0.0967
6. Result: WACC ≈ 9.67%
Conclusion: Without a tax shield, the after-tax cost of debt equals the before-tax cost.
Example 8: High Debt, Low Equity
Scenario: A highly leveraged company.
1. Known Values:
- Market Value of Equity (E) = $300,000
- Market Value of Debt (D) = $700,000
- Cost of Equity (Re) = 18%
- Cost of Debt (Rd) = 8%
- Tax Rate (Tc) = 28%
2. Calculate Total Value (V): V = E + D = $300,000 + $700,000 = $1,000,000
3. Calculate Weights:
- E/V = $300,000 / $1,000,000 = 0.30
- D/V = $700,000 / $1,000,000 = 0.70
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 8% * (1 - 0.28) = 0.08 * 0.72 = 0.0576 or 5.76%
5. Apply WACC Formula: WACC = (0.30 * 0.18) + (0.70 * 0.0576)
WACC = 0.054 + 0.04032 = 0.09432
6. Result: WACC ≈ 9.43%
Conclusion: The higher debt weight contributes significantly, despite the lower after-tax cost of debt compared to equity.
Example 9: Equal Weights
Scenario: A company with 50/50 split between equity and debt values.
1. Known Values:
- Market Value of Equity (E) = $1,000,000
- Market Value of Debt (D) = $1,000,000
- Cost of Equity (Re) = 10%
- Cost of Debt (Rd) = 5%
- Tax Rate (Tc) = 30%
2. Calculate Total Value (V): V = E + D = $1,000,000 + $1,000,000 = $2,000,000
3. Calculate Weights:
- E/V = $1,000,000 / $2,000,000 = 0.50
- D/V = $1,000,000 / $2,000,000 = 0.50
4. Calculate After-Tax Cost of Debt: Rd * (1 - Tc) = 5% * (1 - 0.30) = 0.05 * 0.70 = 0.035 or 3.5%
5. Apply WACC Formula: WACC = (0.50 * 0.10) + (0.50 * 0.035)
WACC = 0.05 + 0.0175 = 0.0675
6. Result: WACC = 6.75%
Conclusion: With equal market values, the WACC is a weighted average of the costs.
Example 10: Using WACC for Investment Decision
Scenario: A company calculated its WACC and is evaluating a new project.
1. Company WACC (calculated using this tool): Suppose the calculator output is 8.5%.
2. Project Evaluation: The company is considering a new project that is expected to yield a return of 10%.
3. Decision Rule: A common rule is to accept projects with an expected return greater than the company's WACC (assuming the project has similar risk to the company's average operations).
4. Comparison: 10% (Project Return) > 8.5% (Company WACC)
5. Conclusion: Based on this simplified WACC analysis, the project's expected return exceeds the cost of financing it, suggesting it could be a value-creating investment. (Note: Real-world decisions involve many more factors, including project-specific risk.)
Frequently Asked Questions about WACC
1. What does WACC stand for?
WACC stands for Weighted Average Cost of Capital. It represents the average rate of return required by a company's investors (both equity and debt holders).
2. Why is WACC important?
WACC is often used as a discount rate in valuation models (like DCF) to determine the present value of future cash flows. It helps businesses decide whether potential projects or acquisitions are worthwhile—if the expected return is higher than the WACC, the project may create value.
3. What is the main formula for WACC?
The core formula is: WACC = (E/V * Re) + (D/V * Rd * (1 - Tc)).
4. How do I find the Market Value of Equity (E)?
For publicly traded companies, this is typically the current stock price multiplied by the number of outstanding shares (Market Capitalization).
5. How do I find the Market Value of Debt (D)?
This is the current market price of all outstanding debt, including bonds and loans. If market prices aren't available, book values are sometimes used as an approximation, though market values are theoretically preferred.
6. How is the Cost of Equity (Re) determined?
Common methods include the Capital Asset Pricing Model (CAPM), the Dividend Discount Model, or Arbitrage Pricing Theory (APT). CAPM (Re = Rf + β * (Rm - Rf)) is widely used.
7. How is the Cost of Debt (Rd) determined?
This is the return a company's creditors demand. For publicly traded bonds, it can be approximated by the yield to maturity (YTM). For bank loans, it's the interest rate charged. It's the before-tax cost.
8. Why is the Cost of Debt multiplied by (1 - Tax Rate)?
Interest payments on debt are usually tax-deductible expenses for corporations. This tax shield reduces the company's tax liability, making the *net* or *after-tax* cost of debt lower than the before-tax cost.
9. Do I have to use market values for Equity and Debt?
Yes, using market values is considered best practice for WACC calculations because WACC represents the cost of *current* financing. Book values are historical and do not reflect the current cost of capital.
10. What happens to WACC if the tax rate is zero?
If the tax rate is zero (Tc = 0), the (1 - Tc) term becomes (1 - 0) = 1. The after-tax cost of debt is then simply equal to the before-tax cost of debt (Rd * 1 = Rd). The debt tax shield disappears.
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