WACC Calculator
Weighted average cost of capital — the hurdle rate for value creation.
How WACC is calculated
WACC blends what a company pays its shareholders and its lenders into a single discount rate, weighted by how much of each source of capital it actually uses. It's the standard rate for discounting future cash flows in a DCF valuation, and it also serves as a hurdle rate: any project or investment expected to return less than WACC destroys value for the company's capital providers, even if it's nominally profitable. Cost of equity is usually estimated with CAPM, which itself draws on the market risk premium and risk-free rate.
The formula is: WACC = (E/(E+D)) × Cost of Equity + (D/(E+D)) × Cost of Debt × (1 − Tax Rate). Using this calculator's defaults — $500M equity, $200M debt, 9% cost of equity, 5% pre-tax cost of debt, and a 25% tax rate — the weights are 500/700 ≈ 71.4% equity and 200/700 ≈ 28.6% debt, giving WACC = 71.4% × 9% + 28.6% × 5% × 0.75 ≈ 6.43% + 1.07% = 7.5%. Comparing that 7.5% hurdle rate against a company's actual return on invested capital — see the DuPont Analysis calculator for the ROE decomposition behind that return — shows whether it's genuinely creating value.
Frequently asked questions
- What is WACC used for?
- It's the minimum return a company needs to earn on its investments to satisfy both shareholders and lenders — used as the discount rate in DCF valuations and as a hurdle rate for capital projects.
- Where do cost of equity and cost of debt come from?
- Cost of equity is typically estimated with CAPM (see the CAPM calculator). Cost of debt is the yield the company currently pays on its debt, or its interest expense divided by total debt as a rough proxy.
- What is WACC and why does it matter?
- WACC (Weighted Average Cost of Capital) blends a company's cost of equity and after-tax cost of debt, weighted by how much of each the company actually uses. It matters because it represents the minimum return a company must earn on its investments to satisfy everyone who has provided it capital.
- What is WACC used for in valuation?
- WACC is the standard discount rate used in discounted cash flow (DCF) valuation — future cash flows are discounted back to present value using WACC. It is also used as a hurdle rate: capital projects expected to return less than WACC destroy value even if they are nominally profitable.
- What is a typical WACC for a listed company?
- Most large, stable listed companies have a WACC somewhere in the 6–10% range, though this varies significantly with interest rates, industry risk, and capital structure — smaller or riskier companies, and those in higher interest rate environments, can have a WACC well above that.
- How does capital structure affect WACC?
- Debt is usually cheaper than equity (interest is tax-deductible and lenders take less risk than shareholders), so adding debt initially lowers WACC. But beyond a certain point, more debt raises the risk — and therefore the cost — of both debt and equity, pushing WACC back up. There is typically an optimal capital structure that minimises WACC.
- What is the difference between WACC and cost of equity?
- Cost of equity is the return shareholders alone require. WACC blends cost of equity with after-tax cost of debt, weighted by their respective shares of the capital structure — so WACC is generally lower than cost of equity for any company that uses some debt financing.
- If ROIC > WACC, what does that mean?
- It means the company is generating returns on its invested capital that exceed what it costs to raise that capital — in other words, it is creating value for its capital providers. If ROIC < WACC, the company is destroying value even if it reports a profit.