WACC Calculator

Compute Weighted Average Cost of Capital (WACC) using CAPM or manual equity pricing, after-tax debt shielding, and capital structure weighting.

Capital Structure & Cost Parameters

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CAPM Parameters
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Weighted Average Cost of Capital (WACC)
8.536%blended discount rate

Total Enterprise Capital: $1.40M

71.4% Eq / 28.6% Debt

Cost of Equity (Re)

10.30%

CAPM return

After-Tax Debt (Rd)

4.13%

25% tax shield

Equity Weight

71.4%

Share of capital

Debt Weight

28.6%

Leverage share

Capital Structure & Contribution Breakdown

Equity Component (71.4% × 10.30%)+7.357%
Debt Component (28.6% × 4.13%)+1.179%
Total Capital Blended WACC8.536%
Total Capitalization (E + D)$1.40M
Valuation Application Note

When building a Discounted Cash Flow (DCF) model, discount Free Cash Flow to Firm (FCFF) at the calculated 8.54%. For Free Cash Flow to Equity (FCFE), use the Cost of Equity (10.30%) directly.

Weighted Average Cost of Capital (WACC) Formulas
Master WACC Formula
WACC = (We × Re) + (Wd × Rd × (1-T))
Cost of Equity (CAPM)
Re = Rf + β × (Rm - Rf)
After-Tax Debt Cost
Rd,after-tax = Rd × (1 - Tax Rate)
Step-by-Step Calculation Breakdown
Example: $1,000M Equity, $400M Debt, Rf = 4.25%, β = 1.10, ERP = 5.50%, Rd = 5.50%, T = 25%
1. Cost of Equity (CAPM): 4.25% + (1.10 × 5.50%) = 10.30%
2. After-Tax Cost of Debt: 5.50% × (1 - 0.25) = 4.125%
3. Total Capital (V): $1,000M + $400M = $1,400M
4. Weights: Equity = 71.43% ($1,000M ÷ $1,400M), Debt = 28.57% ($400M ÷ $1,400M)
5. Equity Contribution: 71.43% × 10.30% = 7.357%
6. Debt Contribution: 28.57% × 4.125% = 1.179%
7. Blended WACC: 7.357% + 1.179% = 8.536%
Corporate Hurdle Rate:8.54% Discount Rate

Applications in Valuation and Corporate Finance

  • DCF Discount Rate (FCFF): In Discounted Cash Flow models, unlevered free cash flows are discounted at WACC because they belong to all capital claimants.
  • Project Hurdle Rate (Capital Budgeting): For a capital expenditure or acquisition to create enterprise value, its Expected Internal Rate of Return (IRR) must strictly exceed WACC.
  • Optimal Capital Structure: Management teams optimize leverage to minimize WACC, thereby maximizing the total enterprise value of the firm.

Frequently Asked Questions

What is WACC (Weighted Average Cost of Capital)?
WACC represents the average rate of return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital. It serves as the standard discount rate in DCF financial modeling and corporate capital budgeting decisions.
How is WACC calculated?
WACC = (E/V × Re) + (D/V × Rd × (1 - T)). Where E is market value of equity, D is market value of debt, V = E + D (total enterprise capital), Re is cost of equity, Rd is pre-tax cost of debt, and T is the corporate marginal tax rate.
Why is the cost of debt adjusted for taxes (1 - T)?
Interest expense on corporate debt is tax-deductible in most jurisdictions. This creates an interest tax shield, making the true economic after-tax cost of debt Rd × (1 - Tax Rate).
Should I use market value or book value for Equity and Debt?
Always use market values whenever possible. Book value reflects historical accounting costs, whereas market value represents the actual current opportunity cost of capital demanded by investors.
How does the Capital Asset Pricing Model (CAPM) work?
CAPM calculates the required return on equity as: Re = Risk-Free Rate (Rf) + Beta (β) × Equity Risk Premium (ERP). It prices equity based on systematic market volatility.

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