WACC Calculator Guide
Use this WACC calculator to estimate weighted average cost of capital from market value of equity, debt, preferred stock, cost of equity, after-tax cost of debt, and capital structure weights.
How to use the WACC calculator
Enter the market value of equity, total debt, risk-free rate, beta, expected market return, cost of debt, tax rate, and any preferred stock. The calculator estimates cost of equity using CAPM, after-tax cost of debt, capital weights, and the final WACC.
You can compare the result with an industry WACC and target debt ratio to review whether the company has a competitive cost of capital and a reasonable capital structure.
WACC formula
The common WACC formula is: WACC = (E / V x Re) + (D / V x Rd x (1 - Tax Rate)) + (P / V x Rp). E is equity value, D is debt value, P is preferred stock value, and V is total capital.
Re is cost of equity, Rd is cost of debt, and Rp is cost of preferred stock. Debt is adjusted for taxes because interest expense may create a tax shield.
Cost of equity and cost of debt
This calculator estimates cost of equity with CAPM: Cost of Equity = Risk-Free Rate + Beta x Market Risk Premium. A higher beta or higher market risk premium raises the equity cost.
Cost of debt should reflect the company's current borrowing rate, not only the coupon rate on old debt. The after-tax cost of debt equals Cost of Debt x (1 - Tax Rate).
How to interpret WACC
WACC is often used as a discount rate, hurdle rate, or minimum required return for investments with similar risk to the business. A project usually needs an expected return above WACC to create value.
A lower WACC can make growth investments more attractive, but very high leverage can increase financial risk and eventually raise both debt and equity costs.
Common WACC mistakes
The most common mistake is using book values instead of market values for capital weights. WACC should usually reflect current market values because investors price capital based on current opportunity costs.
Another mistake is using the same WACC for every project. Projects with different risk, countries, currencies, or leverage may need adjusted discount rates.
- Use market value weights when possible.
- Use current borrowing costs for debt.
- Match the WACC to the risk of the cash flows being analyzed.
- Review WACC when rates, leverage, beta, or market conditions change.