WACC Calculator
Calculate Weighted Average Cost of Capital. Determine the blended cost of equity and debt financing.
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Debt Component
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Debt interest provides a tax shield.
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By Prof. David Anderson
Finance Professor | Valuation Expert
"In my Corporate Finance classes, I call WACC the 'Bridge to Value.' It connects the accounting reality (Balance Sheet) with the future potential (Discounted Cash Flow). It is the single most critical number in valuation. Get the WACC wrong, and your multi-billion dollar DCF model becomes worthless. Today, we will move beyond the textbook theory and calculate WACC like a Wall Street analyst—incorporating the Tax Shield, calculating Implied Beta, and correctly weighting Market Values."
WACC Calculator & Formula: The DCF Discount Rate & Tax Shield
Weighted Average Cost of Capital, CAPM Analysis & Industry Benchmarks
1. The Anatomy of WACC: Decoding the Formula
WACC is the weighted average of the cost of two sources of capital: Equity (money from shareholders) and Debt (money from lenders). It serves as the Hurdle Rate for investment decisions.
$$ WACC = \left( \frac{E}{V} \times Re \right) + \left( \frac{D}{V} \times Rd \times (1 - T) \right) $$
The Foundation of Modern Valuation
Key Variables:
- $E$: Market Value of Equity (Share Price × Shares Outstanding).
- $D$: Market Value of Debt (Not just Book Value).
- $V$: Total Value of Capital ($E + D$).
- $Re$: Cost of Equity (Calculated via CAPM).
- $Rd$: Cost of Debt (Interest Rate).
- $T$: Corporate Tax Rate (The Shield).
2. Cost of Equity ($Re$): The CAPM Engine
Unlike debt, equity doesn't have a clear "interest rate." Shareholders don't send you an invoice. Instead, their cost is the Expected Return they demand for the risk they take. We calculate this using the Capital Asset Pricing Model (CAPM).
$$ Re = Rf + \beta (Rm - Rf) $$
| Component | Meaning | Where to find it? |
|---|---|---|
| $Rf$ (Risk-Free Rate) | The return on a "safe" investment. | Usually the 10-Year US Treasury Yield (e.g., 4.2%). |
| $\beta$ (Beta) | Measure of volatility vs. the market. | Yahoo Finance or Bloomberg (e.g., 1.2 for Tech, 0.5 for Utility). |
| $(Rm - Rf)$ | Equity Risk Premium (ERP). Extra return for stocks. | Historically ranges from 4.5% to 6.0% (Data from Damodaran). |
3. Cost of Debt ($Rd$): The "Tax Shield" Magic
Debt is cheaper than equity for two reasons: 1. It has higher priority in bankruptcy (lower risk). 2. Interest payments are Tax Deductible.
This deductibility creates a Tax Shield. If you pay 5% interest and the tax rate is 21%, the government effectively subsidizes part of your interest.
Example: The Shield in Action
• Interest Rate: 5.00%
• Tax Rate: 21%
• Effective Cost of Debt: $5\% \times (1 - 0.21) = \mathbf{3.95\%}$
This is why companies issue debt—it lowers their overall WACC!
Advanced: Yield to Maturity (YTM) vs. Coupon Rate
Professionals do not use the "Coupon Rate" (what is written on the bond). They use the Yield to Maturity (YTM). If a company's bonds are trading at a discount, their actual cost to borrow new money is higher than the coupon. Always use YTM for the Cost of Debt.
4. Professor's Warning: Market vs. Book Value
🚫 The #1 Student Mistake
When calculating the weights ($E/V$ and $D/V$), NEVER use the Book Value of Equity from the Balance Sheet. Book Value is a historical accounting number that often creates a massive error.
You MUST use Market Value of Equity.
Market Value Equity = Share Price × Total Shares Outstanding
Using Book Value will typically underestimate the weight of equity (since Market Value is usually higher), leading to an artificially low WACC and a valuation that is dangerously high.
5. Step-by-Step Calculation: TechGiant Inc.
Let's calculate the WACC for a hypothetical company, "TechGiant Inc."
1
Calculate Capital Structure Weights
• Market Equity ($E$): $800 Million
• Market Debt ($D$): $200 Million
• Total Value ($V$): $1,000 Million
Weight of Equity (We) = 80% | Weight of Debt (Wd) = 20%
2
Calculate Cost of Equity (CAPM)
• Risk-Free Rate ($Rf$): 4.0%
• Beta ($\beta$): 1.2 (Tech volatility)
• Market Premium ($Rm-Rf$): 5.0%
Cost of Equity = 4.0% + 1.2(5.0%) = 10.0%
3
Calculate After-Tax Cost of Debt
• Pre-Tax Cost of Debt ($Rd$): 6.0%
• Tax Rate ($T$): 25%
After-Tax Cost = 6.0% * (1 - 0.25) = 4.5%
4
Final WACC Calculation
$$ WACC = (0.80 \times 10.0\%) + (0.20 \times 4.5\%) $$
$$ WACC = 8.0\% + 0.9\% $$
WACC = 8.9%
6. Private Company WACC: The "Pure Play" Method
What if the company is not listed on the stock exchange? It has no stock price, so it has no Beta. How do you find the Cost of Equity?
We use the "Pure Play" Build-Up Method.
- Find a Public Proxy: Identify a public company in the same industry (e.g., use Home Depot if valuing a local hardware store).
- Unlever the Beta: Remove the public company's debt risk to find the "Asset Beta."
Formula: $\beta_u = \beta_l / (1 + ((1-T) * (D/E)))$ - Re-lever the Beta: Apply the private company's specific debt structure to find its specific Equity Beta.
- Add Size Premium: Small companies are riskier. Add a "Small Cap Premium" (often 3-5%) to the final CAPM result.
7. Optimal Capital Structure: The WACC Curve
If debt is cheaper than equity, why shouldn't a company be 99% funded by debt?
As you add debt, WACC initially goes down (due to the tax shield). But eventually, the Bankruptcy Risk rises. Lenders demand higher rates ($Rd$ spikes), and shareholders panic (Beta spikes).
The Optimal Capital Structure is the bottom of the "U-Shape" curve where WACC is minimized. For most mature companies, this is around 20-40% Debt.
8. Industry WACC Benchmarks (2026 Est.)
| Industry | Typical Beta ($\beta$) | Debt Level | Typical WACC |
|---|---|---|---|
| Utilities (Water/Power) | Low (0.4 - 0.6) | High | 4.5% - 6.0% |
| Consumer Staples | Medium (0.6 - 0.8) | Medium | 6.0% - 7.5% |
| Technology (SaaS) | High (1.2 - 1.5) | Low | 9.0% - 12.0% |
| Biotech / Startups | Very High (1.5+) | Zero | 12.0% - 20.0%+ |
9. Professor's FAQ Corner
Q: Can WACC change over time?
Yes, daily. Since Stock Prices change every second, the Weight of Equity ($E/V$) changes. Also, if the Fed raises interest rates, both the Risk-Free Rate and Cost of Debt increase, driving WACC up.
Q: What if a company has Preferred Stock?
You simply add a third term to the formula: $+ (P/V \times Rp)$. Preferred dividends are not tax-deductible, so there is no $(1-T)$ tax shield for this component.
Q: How does WACC relate to ROIC?
This is the ultimate value test. ROIC - WACC = Economic Profit (EVA). If a company's Return on Invested Capital (ROIC) is higher than its WACC, it is creating value for shareholders. If lower, it is destroying value.
References
- Damodaran, A. (2025). "Data: Cost of Capital by Industry Sector". NYU Stern.
- McKinsey & Company. "Valuation: Measuring and Managing the Value of Companies".
- Investopedia. "Weighted Average Cost of Capital (WACC)".
- CFA Institute. "Level I & II Curriculum: Corporate Issuers".
Calculate Your Hurdle Rate
Jump back to the top to input your Beta, Debt, and Equity.
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