WACC Calculator
Calculate your firm's Weighted Average Cost of Capital — the minimum return rate required to satisfy all capital providers including equity holders, debt holders, and preferred stockholders.
Frequently Asked Questions
What is WACC and what is it used for?
WACC (Weighted Average Cost of Capital) is the blended rate a company must earn on its assets to satisfy all capital providers — equity holders, debt holders, and preferred stockholders. It is used as the discount rate in DCF valuations, as a hurdle rate for investment decisions, and to assess whether new projects create or destroy shareholder value.
What is the WACC formula?
WACC = (E/V × Re) + (D/V × Rd × (1 − Tc)) + (P/V × Rp), where E = equity value, D = debt value, P = preferred stock value, V = E + D + P (total capital), Re = cost of equity, Rd = cost of debt, Rp = cost of preferred stock, Tc = corporate tax rate.
Why is debt multiplied by (1 − tax rate) in WACC?
Interest on debt is tax-deductible in most jurisdictions. A company paying 8% interest on debt with a 25% tax rate effectively only pays 6% after tax (8% × (1 − 0.25) = 6%). This tax shield makes debt cheaper than equity, which is why companies use it in their capital structure.
How is the cost of equity estimated for WACC?
The most common method is CAPM: Re = Risk-free rate + Beta × Equity Risk Premium. Using 2024 US figures: Re = 4.5% (10-yr Treasury) + 1.1 (beta) × 5.5% (ERP) = 10.55%. Beta measures a stock's volatility relative to the market; a Beta > 1 means higher risk and therefore higher required return.
What is a typical WACC for companies in 2024?
WACC varies significantly by industry and risk profile. Large US companies typically have WACCs of 8–12%. Technology companies tend to be 10–15% (higher equity weighting, higher beta). Utilities and infrastructure tend to be 6–8% (stable cash flows, high debt). Use industry benchmarks to sense-check your WACC calculation.