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WACC calculator: weighted average cost of capital
The weighted average cost of capital (WACC) is the return a company must earn to satisfy both its shareholders and its lenders. It is the discount rate most analysts use in a discounted cash flow valuation. Enter the market value of equity and debt, the cost of each, and the tax rate: the calculator returns the WACC and shows how each part contributes.
Weighted average cost of capital
8.63%
Cost of equity 9.70% × 80.0% of capital, plus after-tax cost of debt 4.35% × 20.0%.
The WACC formula
WACC = E ÷ (D + E) × cost of equity + D ÷ (D + E) × cost of debt × (1 − tax rate), where E is the market value of equity and D the market value of debt. The cost of debt is taken after tax because interest is deductible: each dollar of interest reduces the tax bill.
The cost of equity is not observable, so it is estimated, most often with the capital asset pricing model (CAPM): cost of equity = risk-free rate + beta × equity risk premium.
Where to find each input
Risk-free rate: the yield on 10-year US Treasury bonds, published daily. Beta: how much the share has moved with the market, shown on most stock quote pages; above 1 means more volatile than the market. Equity risk premium: the extra return investors demand for owning stocks rather than government bonds, commonly taken between 4% and 6%.
Cost of debt: the interest rate the company would pay to borrow today, approximated by the yield on its bonds or by interest expense divided by total debt. Tax rate: the effective rate from the income statement, or the statutory rate (21% federal in the US). Equity value is the market capitalisation; debt is best taken at market value, and book value is the usual stand-in.
Worked example
Take a company worth $100 billion in equity with $25 billion of debt. With a risk-free rate of 4.2%, a beta of 1.1 and an equity risk premium of 5%, the cost of equity is 9.70%. Debt costs 5.5% before tax, or 4.35% after a 21% tax rate. Equity is 80% of the capital and debt 20%, so the WACC is 8.63%.
Using the WACC in a valuation
In a DCF of the whole company, the WACC discounts the free cash flow available to all investors, and debt is subtracted at the end to reach the value of the shares. When you value free cash flow per share directly, as the DCF calculator below does, many investors use their own required return instead, often 8% to 10% for a large established company.
Arqon’s own valuation models take that second approach: they discount at a fixed required return of 10% a year for every company, rather than a WACC estimated from betas that move with the market. The methodology page sets out the full rules.
Frequently asked questions
What is a good WACC?
There is no good or bad WACC in itself: it measures risk. Large, stable companies often land between 6% and 9%; smaller, more volatile or more indebted ones higher. What matters is whether the company earns more on its capital than its WACC — that is when it creates value.
Why does more debt lower the WACC?
Debt is cheaper than equity, and its interest is tax-deductible, so shifting weight towards debt lowers the average. Up to a point: more debt also makes the shares riskier, which raises beta and the cost of equity, and eventually the cost of debt itself.
Should I use book value or market value for the weights?
Market value, because it is what investors would have to pay today to own the company’s equity and debt. Market capitalisation gives the equity; for debt, book value is a common approximation when bond prices are not available.
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Educational tool. Results depend entirely on your inputs and are not investment advice.