How to use the wacc calculator
- Enter the equity value and the debt value of the business. Only their proportions matter.
- Enter the cost of equity, the pre-tax cost of debt and the tax rate.
- Read the weights, the after-tax cost of debt and the WACC.
- Change one input at a time to see which has the most effect.
Formula
E/V = equity value / (equity value + debt value), and D/V = debt value / (equity value + debt value)
After-tax cost of debt = cost of debt x (1 - tax rate)
WACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate)
All rates are annual percentages. WACC is a weighted average, so it always lies between the cost of equity and the after-tax cost of debt.
60% equity at 10% and 40% debt at 5%
A business is financed 60% by equity and 40% by debt, for example $600,000 and $400,000. The cost of equity is 10%, the cost of debt is 5% and the tax rate is 25%. The after-tax cost of debt is 5% x 0.75 = 3.75%.
WACC = 0.6 x 10% + 0.4 x 3.75% = 6% + 1.5% = 7.5%. With no debt WACC equals the 10% cost of equity, with no equity it equals the 3.75% after-tax cost of debt, and with a 0% tax rate the same example gives 8%.
What WACC represents
WACC is the average rate a business pays to fund itself, with each source weighted by its share of the total. It is often used as the discount rate when valuing future cash flows, so a small change can move a valuation a lot.
Debt is cheaper after tax because interest is often deductible, which is why the tax rate appears in the formula. The tax rate here is the one you enter, so use the rate that actually applies.
Where the inputs come from
The weights usually use market values, not book values. The cost of debt can be the interest rate on current borrowing. The cost of equity is the hardest input, since it is not a rate anyone is charged. Analysts estimate it with models, and this page does not choose one. It uses whatever number you type.
WACC does not include preferred stock or other funding, and it is an estimate. Use it with the DCF calculator, the IRR and NPV calculator, or the present value calculator. To measure a return, see the ROI calculator. It is not investment or valuation advice.
Assumptions and limits
- Equity and debt values are in the same dollars and at the same date.
- Cost of equity, cost of debt and the tax rate are inputs, and the tool does not estimate any of them.
- Preferred stock and other financing are not included.
- The result is an annual percent and is only as good as its inputs.
Frequently asked questions
How do you calculate WACC?
Weight the cost of equity by the equity share, weight the after-tax cost of debt by the debt share, and add the two. The example gives 7.5%.
Why is the cost of debt multiplied by one minus the tax rate?
Interest on debt is often deductible, which lowers its effective cost. The tool applies the tax rate you enter to show the after-tax cost.
Should I use book value or market value for the weights?
Market values are the usual choice for equity, since they reflect what investors currently value the business at. The tool takes whatever values you enter.
Where do I get the cost of equity?
It is an estimate, often built with a model that you choose. The tool does not calculate it, so enter your own figure.