WACC calculator

How this WACC calculator works

The weighted average cost of capital is the return a company must earn on its operations to satisfy both its lenders and its shareholders. It is the discount rate in a DCF of unlevered cash flow.

1. Cost of equity (CAPM)

Shareholders want the risk-free return plus a premium for bearing market risk, scaled by how much the share moves with the market.

2. After-tax cost of debt

Interest is tax-deductible, so debt costs the company less than the rate it pays.

3. Weight them by market value

Use market values, not book values: equity at market capitalisation, and debt at face value as a practical stand-in for its market value.

Where the inputs come from

• Risk-free rate: the yield on a 10-year government bond in the currency of the cash flows. It moves, so use today's figure, not a number from a textbook.
• Equity risk premium: an estimate, usually 4% to 6% for developed markets. State which source you used.
• Beta: from a regression of the share's returns on the market's, ideally cross-checked against comparable companies.
• Cost of debt: the yield on the company's bonds, or interest expense divided by debt as a rough guide to what it has been paying.

Common questions

What is a normal WACC?

For large, established US companies WACC commonly falls between about 6% and 10%, and moves with interest rates. Smaller, more cyclical or more indebted companies sit higher. Because it depends on today's risk-free rate, a figure that was right two years ago may be wrong now.

Should I use book value or market value for the weights?

Market value. Equity should be the market capitalisation, since that is what shareholders' capital is worth today. For debt, face value is normally close enough to market value unless the company is in distress.

Why is the cost of debt reduced for tax?

Interest is deducted before tax is calculated, so each dollar of interest saves the company tax at its marginal rate. The saving is real cash, and the after-tax figure is the cost the company actually bears.

Can WACC be lower than the risk-free rate?

Only with a very low beta or a capital structure dominated by debt whose after-tax cost is below the risk-free rate. It is rarely a defensible discount rate for a risky business, so the calculator flags it when it happens.