WACC Calculator
Where the discount rate comes from, tax shield included.
Work out WACC. Where the discount rate comes from, tax shield included. The assumption doing the work, alongside the result.
Market value, not book value.
Every input here is contestable — beta, the market premium, the market value of debt. A WACC quoted to two decimal places is a false precision; the useful output is a range.
Weighted average cost of capital
9%
60% equity, 40% debt
The tax shield is worth 0.6% here: interest is deductible and dividends are not, so a 6% coupon costs the company 4.5%. That deduction is the entire mechanical argument for leverage — and it stops working once the added risk starts raising both costs.
How the WACC Calculator works
The weighted average cost of capital is what a company pays for money, blended across equity and debt in the proportions it actually uses. It is the rate almost every other tool in this cluster wants as an input. The one subtle term is tax: interest is deductible and dividends are not, so debt costs the company less than its coupon — which is the whole mechanical argument for leverage.
Also known as: weighted average cost of capital calculator · after tax WACC calculator · WACC calculator with percentages · pre tax WACC calculator · cost of capital calculator
The calculation itself
WACC is the equity weight times the cost of equity, plus the debt weight times the cost of debt after tax. The weights come from market values, because that is what the capital is worth today rather than what it was raised at.
The tax term is the only subtle piece. Interest reduces taxable profit and dividends do not, so debt costs the company less than its coupon — multiply the pre-tax cost by (1 − tax rate).
Cost of equity usually comes from CAPM: the risk-free rate plus beta times the market risk premium. Every input there is arguable, which is worth holding in mind before treating the output as precise.
In practice
Equity of 600 and debt of 400 gives weights of 60% and 40%. With a 12% cost of equity and a 6% cost of debt at a 25% tax rate:
Equity contributes 0.6 × 12 = 7.2 points. Debt contributes 0.4 × 6 × 0.75 = 1.8 points. WACC is 9.0%.
Without the tax shield it would be 9.6%, so the deduction is worth 0.6 points here. That saving is the entire mechanical argument for leverage — not that debt is cheap, but that the taxman pays part of it.
Via CAPM instead: a 4% risk-free rate, a beta of 1.2 and a 9% expected market return give 4 + 1.2 × 5 = 10% for equity, which flows through the same weighting.
Why more debt stops helping
Read naively, the formula says WACC keeps falling as debt rises, and at 100% debt it equals the after-tax cost of debt. That conclusion is wrong for a reason the formula cannot see.
As leverage rises, both inputs move. Lenders demand more for the increased chance of default, and shareholders demand more because their claim is now behind a larger fixed obligation. Beta rises with leverage almost mechanically.
So WACC falls, flattens and turns back up. There is a genuine minimum, and it is nowhere near the all-debt end. Holding the two costs fixed while varying the weights — which is what a naive sensitivity table does — produces advice that would bankrupt the company.
Where the figure deceives
Book values for the weights are the commonest error. Book equity can be a small fraction of market equity, and using it produces a weighting that reflects accounting history rather than the capital structure that exists.
Beta is estimated from past returns over an arbitrary window against an arbitrary index, and it moves depending on those choices. The market risk premium is contested by percentage points, not basis points.
So a WACC quoted to two decimals is false precision. The useful output is a range — and if a project's viability flips inside that range, the decision is about the rate rather than the project.
One company-wide WACC also mis-prices divisions with different risk. A stable utility arm and a speculative venture inside the same group do not deserve the same discount rate, and using one is how conglomerates systematically overfund their riskiest units.
Acting on it
Use market values for both weights, and the current yield on the debt rather than its coupon.
Produce a range by varying beta and the market premium across defensible values, and check whether your decisions survive the whole range.
Set project-specific rates where the risk genuinely differs from the business average, rather than applying one number across everything.
Not financial advice. This calculator is for planning and illustration, not financial advice. Real products carry fees, taxes, and terms it does not model. Confirm figures with your lender or a qualified adviser before committing.
Frequently asked questions
How is WACC calculated?
The equity share times the cost of equity, plus the debt share times the cost of debt after tax. Weights come from market values rather than book values, because that is what the capital is actually worth today.
Why is the cost of debt multiplied by (1 − tax rate)?
Because interest reduces taxable profit. A 6% coupon at a 25% tax rate costs the company 4.5%, and that deduction is the reason debt is cheaper than equity beyond just being lower risk.
How do I find the cost of equity?
Usually CAPM: the risk-free rate plus beta times the market risk premium. Every input there is contestable, which is worth remembering before treating a WACC to two decimal places as precise.
Should I use book or market values for the weights?
Market, for both. Book equity in particular can be wildly different from market equity, and using it produces a weighting that reflects accounting history rather than the capital structure.
Does more debt always lower WACC?
Only up to a point. The tax shield lowers it while the debt stays safe; past that, lenders and shareholders both demand more for the added risk and WACC turns back up. The minimum is real but not where a naive reading of the formula puts it.
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