WACC Calculator: Weighted Average Cost of Capital Formula

Inputs you need before calculating WACC

To run an accurate Weighted Average Cost of Capital model, you need to collect five key inputs representing the capital structure and funding costs of the business:

• Market Value of Equity (E): Typically the total shares outstanding multiplied by the current stock price.
• Market Value of Debt (D): The market value or total book value of all outstanding interest-bearing debt liabilities.
• Cost of Equity (Re): The required rate of return demanded by equity shareholders, often derived via CAPM.
• Cost of Debt (Rd): The average pre-tax interest rate paid on corporate loans, bonds, and notes.
• Corporate Tax Rate (Tc): The marginal tax rate applicable to corporate profits, used to derive the interest tax shield.

How to read the WACC result

Once computed, the calculator outputs the blended cost of capital. An equity weight (E/V) and debt weight (D/V) represent the proportions of corporate funding.

The After-tax Cost of Debt reflects the interest deduction benefit, while the final WACC percentage represents the average hurdle rate. The sensitivity grid shows how the WACC shifts as the weight of debt and the cost of equity fluctuate, and the Scenario Comparison contrasts conservative (Bear), moderate (Base), and optimistic (Bull) states.

Cost of equity

Cost of equity is the return equity investors require for owning the business. Analysts often estimate it with CAPM using the risk-free rate, levered beta, and equity risk premium.

Cost of debt

Cost of debt is the borrowing rate on loans, bonds, or private credit. The input should reflect the current marginal borrowing cost when the model is forward-looking.

Interest tax shield

Because interest expense may reduce taxable income, WACC uses after-tax debt cost. The formula is pre-tax cost of debt multiplied by one minus the tax rate.

Private company WACC

Private companies usually do not have observable market capitalization or traded beta. Analysts often use guideline public companies, peer capital structures, normalized borrowing rates, and target leverage to estimate a defensible WACC range.

Size premium in CAPM and WACC

The size premium in CAPM adjusts cost of equity upward to reflect the higher required return demanded by investors in smaller companies. When added inside the CAPM formula — alongside the risk-free rate, beta, and equity risk premium — the size premium in CAPM captures incremental risk from customer concentration, limited access to capital markets, thinner management depth, or less liquid ownership. This size-adjusted cost of equity then flows directly into the WACC calculation.

A company-specific risk premium is distinct from a broad size premium. It should be tied to identifiable, firm-level risks such as revenue concentration, unstable margins, refinancing pressure, or dependence on a small management team. Because this input can materially raise WACC, analysts should document the rationale for each premium and test a sensitivity range instead of relying on a single point estimate.

When WACC fits

WACC is typically appropriate for unlevered DCF models where projected free cash flow belongs to all capital providers and the capital structure is reasonably stable.

When another rate fits

Project-specific, country-specific, or venture-stage cash flows may require a different discount rate if their risk profile is materially above or below the company's blended cost of capital.

Sensitivity matters

Small discount rate changes can materially change DCF value. Analysts should test WACC ranges rather than relying on a single point estimate.

Example inputs

To demonstrate WACC derivation, let's take a hypothetical mid-market firm with the following capital and rate metrics:

• Market Value of Equity (E) = $1,000,000
• Market Value of Debt (D) = $250,000
• Cost of Equity (Re) = 12.00%
• Pre-tax Cost of Debt (Rd) = 6.00%
• Corporate Tax Rate (Tc) = 21.00%

Step-by-step WACC calculation

First, sum total capital: V = $1,000,000 + $250,000 = $1,250,000.

Next, calculate the proportions: Equity Weight (E/V) = 80.00%, Debt Weight (D/V) = 20.00%.

Calculate the tax-shielded cost of debt: After-tax Rd = 6% * (1 - 0.21) = 4.74%.

Finally, blend the values: WACC = (80% * 12%) + (20% * 4.74%) = 9.60% + 0.95% = 10.55%. This 10.55% serves as the baseline discount rate.

What a higher WACC means

A higher WACC indicates that a company has a higher risk profile in the eyes of market investors. Because capital providers demand greater returns for higher risk, the cost of raising capital increases. In valuation terms, a high cost of capital dampens asset value because future cash flows are discounted heavily.

What a lower WACC means

A lower WACC suggests that corporate operations are stable and low-risk, allowing the company to raise capital cheaply. Low discount rates preserve cash flow value in DCF models, yielding higher enterprise value. Blue-chip companies with stable revenues typically enjoy lower WACCs.

How WACC affects DCF valuation

In a Discounted Cash Flow model, WACC is the denominator. A small change in the discount rate has a compounding effect over multi-year cash flow projections. For instance, increasing WACC from 9% to 10.5% in a 10-year model can trigger a double-digit percentage decline in intrinsic business valuation.