WACC Calculator

WACC = (equity ÷ (equity + debt)) × cost of equity + (debt ÷ (equity + debt)) × cost of debt × (1 − tax rate); after-tax cost of debt = cost of debt × (1 − tax rate); equity weight + debt weight = 100 percent

Equity value

The market value of the shareholders' stake, not its book value. Book equity is a pile of historical costs; the equity the shareholders are pricing at a required return of twelve percent is what the market says it is worth today. Using the balance sheet figure instead is the second most common way to get a WACC that looks reasonable and is wrong.

Debt value

The market value of the borrowing, not the face value of the loans. For a company with ordinary bank debt the two are usually close enough, and for a company with traded bonds they are not — a bond issued at par and now trading at eighty is eighty of debt in this calculation.

Cost of equity

The return shareholders require to hold the shares, which is an expectation about the future rather than a payment anyone has made. Nothing on a company's books states it; it has to be estimated, and the estimate carries more uncertainty than every other field here combined.

Cost of debt

The interest rate the company pays on its borrowing, before tax. Because it is the rate on the whole debt rather than on the newest loan, it is best taken as the yield the company's debt currently trades at, or the rate it would be offered today.

Tax rate

The corporate tax rate that applies to the interest deduction. It is the marginal rate on the next unit of profit, not the average rate over last year's return, because the question is what the next interest payment saves.

Equity weight

Equity as a share of total capital. It and the debt weight are computed so that they add to exactly 100 percent — the debt weight is derived by subtraction rather than rounded separately, so the two can never disagree by a hundredth in front of the reader.

After-tax cost of debt

The interest rate multiplied by one minus the tax rate, printed on its own line because it is the whole point of the asymmetry: at a 25 percent tax rate, six percent of interest costs four and a half percent, while the twelve percent demanded by shareholders stays at twelve.

WACC

The weighted average of the two, which is the minimum return a project has to earn to leave the company's value unchanged. Spend below it and the company is worth less than before the investment, however profitable the project looks on its own terms.

Use it as the discount rate in a valuation, or as the hurdle a project has to clear before it creates value rather than destroying it. It is the number that the net present value and internal rate of return pages both need and neither produces, which is why it stands on its own here. Three things to hold on to while reading it. The market values of the equity and the debt are what belong in the first two fields, and the page cannot tell book value from market value when it looks at a number. The after-tax treatment applies to the debt only — multiplying the whole expression by one minus the tax rate is the mistake this formula invites, and it quietly raises the cost of equity as well as lowering the cost of debt. And the answer is only as reliable as the cost of equity you estimated, since a figure nobody can look up is carrying most of the result.

1. The default: 600,000 of equity at 12 percent and 400,000 of debt at 6 percent, taxed at 25 percent

   1. Total capital: 600,000 + 400,000 = 1,000,000
   2. Equity weight: 600,000 ÷ 1,000,000 = 60 percent; debt weight: 100 − 60 = 40 percent
   3. After-tax cost of debt: 6 × (1 − 0.25) = 4.5 percent
   4. WACC: 60 percent × 12 + 40 percent × 4.5 = 7.2 + 1.8 = 9 percent

   Every figure on the panel can be checked from the others, which is the point of printing the weights and the after-tax cost. Note where the blend lands: between 12 and 4.5, closer to the equity side because the equity is the larger share. The tax shield is visibly doing work here — the debt costs 6 percent to the borrower's income statement and 4.5 percent to this calculation.

2. No debt at all: a million of equity at 10 percent

   1. Equity weight: 1,000,000 ÷ 1,000,000 = 100 percent; debt weight: 0 percent
   2. After-tax cost of debt: 7 × (1 − 0.25) = 5.25 percent
   3. WACC: 100 percent × 10 + 0 percent × 5.25 = 10 percent

   With no debt the WACC is simply the cost of equity, and the after-tax cost of debt line still prints 5.25 percent even though it weighs nothing — a number that exists and does not count. That is worth seeing once, because it shows the weights are doing real work in the formula rather than decorating it, and it is the cleanest case for reading the panel: a weighted average where one weight is zero is just the other term.

3. Heavier borrowing: 30 / 70, with a 21 percent tax rate

   1. Equity weight: 300,000 ÷ 1,000,000 = 30 percent; debt weight: 70 percent
   2. After-tax cost of debt: 8 × (1 − 0.21) = 6.32 percent
   3. WACC: 30 percent × 15 + 70 percent × 6.32 = 4.5 + 4.424 = 8.92 percent

   Cheap debt in the mix pulls the average below the cost of equity, which is the effect a company is buying when it borrows. Two things keep that from being free. The cost of equity is 15 percent here rather than 12, because a company carrying that much debt is a riskier proposition for its shareholders — this page takes that figure as given, and the person filling it in has already decided how much of the leverage to price in.

4. Weights that do not divide evenly: 333,333 and 666,667

   1. Equity weight: 333,333 ÷ 1,000,000 = 33.333 percent, printed as 33.33
   2. Debt weight: 100 − 33.33 = 66.67 percent
   3. After-tax cost of debt: 6 × (1 − 0.25) = 4.5 percent
   4. WACC: 33.33 percent × 12 + 66.67 percent × 4.5 = 3.9996 + 3.00015 = 7 percent

   Rounded independently the debt weight would be 66.6667 and print as 66.67 as well, but the two can part company by a hundredth on other inputs, and 33.34 + 66.67 = 100.01 is the kind of thing a reader notices immediately and cannot explain. Deriving the second weight by subtraction makes that impossible. The cost is that the debt weight can differ by 0.01 from a separately rounded debt ÷ total, which is a trade this page makes deliberately in favour of the panel adding up.

5. A hundred percent tax rate: the shield at its limit

   1. Equity weight: 50 percent; debt weight: 50 percent
   2. After-tax cost of debt: 8 × (1 − 1) = 0 percent
   3. WACC: 50 percent × 10 + 50 percent × 0 = 5 percent

   No jurisdiction taxes corporate profit at a hundred percent, and the field allows it because the purpose here is to show the limit of the mechanism rather than to describe a real tax system. What it shows is that the tax shield can reduce the cost of debt to nothing and no further: the deductible interest can be worth at most the interest itself, so the after-tax cost approaches zero from above and never crosses it. The same rule stops a negative tax rate from producing a subsidy that does not exist.

The weights and the costs of capital are not independent, and this page treats them as if they were. Cost of equity rises with leverage in reality — shareholders of a heavily indebted company demand more — so the cost of equity field has to be entered already reflecting the capital structure you are testing, and a table that holds it fixed while debt rises will show the average falling further than it truly would. The weights are market values, and the two figures that belong in those fields are not on any balance sheet: book equity is a historical cost and the market value of debt is only observable when the debt trades. The cost of equity is an estimate from a model rather than an observation, and it usually carries the widest error bar on the panel. The tax shield is taken at the headline rate and assumed to be usable in full, which is not true for a company with no taxable profit, and the rate that applies is the marginal one rather than last year's average. Finally, WACC is a hurdle and not a verdict: it says what a project has to earn, never whether it will, and it is a company-wide average being applied to a single project whose risk may be nothing like the company's.

Why is only the debt discounted for tax?

Because only interest is deductible. A company can subtract the interest it pays from its profit before tax is calculated, so every unit of interest costs it less than a unit — at a 25 percent tax rate, six percent of interest costs four and a half. Dividends are paid out of profit that has already been taxed, so the return shareholders require is not reduced by anything. Applying one minus the tax rate to the whole formula is the classic version of this mistake: it lowers the cost of equity too, producing a WACC that is too low and a hurdle rate that lets bad projects through.

Should I use book value or market value for the equity?

Market value. A WACC is the cost of the capital the company is using at the moment, and the shareholders who require a return own shares priced in the market rather than recorded at what they cost years ago. The gap is not small: a company that has grown since it was funded can have a market value several times its book value, and using the book figure would weight its cheapest capital far too heavily. The one exception is a company with a target capital structure it is steering towards, where the target weights are the right ones to use instead.

What is the tax shield worth?

The interest rate multiplied by the tax rate, per unit of debt — the difference between the cost of debt and the after-tax cost of debt printed on the panel. At a 25 percent rate, six percent of debt costs four and a half, so the shield is worth one and a half points on the debt. It is a real saving rather than an accounting trick, but it is also conditional: it is only worth anything to a company that has taxable profit to reduce, and a company making losses cannot use it in that year.

Doesn't borrowing more always lower the WACC?

It lowers the average of the two rates, because debt is cheaper than equity, and that is what this page shows if you hold the cost of equity fixed. It is not what happens. Lenders and shareholders both respond to rising debt — lenders charge a higher rate and shareholders demand a higher return, because a leveraged company is a riskier one for both. Since the cost of equity is an input here rather than something the page models, a table showing the average falling as debt rises is an arithmetic result about the weights, not a claim about the world.

What do I do with the number once I have it?

It becomes the discount rate in a valuation and the hurdle rate for a project. Discounting a project's future cash flows at the WACC gives its net present value, and a project whose internal rate of return exceeds the WACC adds value while one below it destroys value. The whole point of computing it is that comparison, which is why this page prints the number and stops: whether a given WACC is high or low has no answer on its own, since the same rate can be comfortably beaten by one company's projects and unattainable for another's.

Should the whole formula be multiplied by one minus the tax rate?

No, and it is a common enough error to be worth naming twice. The parentheses belong around the cost of debt term only. Multiplying the entire expression discounts the equity return as though dividends were deductible, which they are not, and the result is systematically low — by roughly the tax rate times the equity weight times the cost of equity, which on this page's defaults would be about 1.8 percentage points. The after-tax cost of debt is printed separately precisely so that the asymmetry is visible on the panel.

• Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs — the United States Office of Management and Budget's guidance on discount rates, including why a nominal rate built from the cost of capital is the right basis — Office of Management and Budget, Executive Office of the President (United States)
• Liability/Debt — the glossary definition of a liability and of debt as the obligation to repay, which is the second of the two components being weighted — Investor.gov, U.S. Securities and Exchange Commission (United States)
• Market Capitalization — the glossary definition of the market value of a company's equity, which is what belongs in the equity field rather than the book value — Investor.gov, U.S. Securities and Exchange Commission (United States)