— Business & Valuation
WACC Calculator
Calculate weighted average cost of capital from cost of equity, after-tax debt, preferred equity, and market-value weights. Build equity with CAPM, blend debt tranches, see component contributions, and test how leverage changes WACC.
WACC
8.43%
- Cost of equity
- 10.05%
- After-tax cost of debt
- 6%
- Equity weight (E/V)
- 60%
- Debt weight (D/V)
- 40%
- Equity contribution
- 6.03%
- Debt contribution
- 2.4%
Try: CAPM-built WACC, Direct cost of equity, Emerging market (+CRP), With preferred
— The component table
| Component | Market value | Weight | Cost | After-tax cost | Contribution |
|---|---|---|---|---|---|
| Equity | $6,000 | 60% | 10.05% | 10.05% | 6.03% |
| Debt | $4,000 | 40% | 8% | 6% | 2.4% |
| WACC | $10,000 | 100% | 8.43% |
— Cost of equity — the CAPM build-up
| Build-up step | Rate |
|---|---|
| Risk-free rate | 4% |
| Beta (1.1) × ERP (5.5%) | 6.05% |
| = Cost of equity | 10.05% |
— The cost of capital, visualized
Download— How it works
WACC = (E/V)·Rₑ + (D/V)·R_d·(1 − tax) [+ (P/V)·R_p], where V = E + D + P. CAPM: Rₑ = R_f + β·ERP [+ country risk + size premium]. Hamada: β_unlevered = β_L ÷ (1 + (1 − tax)·D/E); relever to the target structure.
Why market-value weights, and after-tax debt
The WACC blends two costs an investor cares about: the return equity holders require and the interest the company pays on its debt. Two choices make the number meaningful. First, weight by market value, not book — the WACC is a forward-looking opportunity cost, and equity especially trades far from book; using book weights understates the true cost of equity capital. Second, take the cost of debt after tax, because interest is tax-deductible: a 8% loan at a 25% tax rate costs only 6% after the shield. That tax shield is the entire reason a sprinkle of debt lowers the WACC — and why the leverage chart slopes down before it turns back up.
Worked example — 60% equity at 10.05%, 40% debt at 8% pre-tax, 25% tax: After-tax cost of debt = 8% × (1 − 0.25) = 6.00%. WACC = 0.60 × 10.05% + 0.40 × 6.00% = 6.03% + 2.40% = 8.43%.
Building the cost of equity with CAPM
Equity has no stated coupon, so its cost is estimated — usually with CAPM: the risk-free rate plus beta times the equity risk premium. Beta scales the market’s extra return to this particular stock’s riskiness. The build-up table shows each piece adding up to the final figure. Two refinements matter in practice. For emerging markets, add a country risk premium — for an Indian valuation, skipping it materially understates the cost of equity. And when a company isn’t publicly traded (or you want a peer-based beta), use Hamada relevering: strip the leverage out of a comparable’s beta, then relever it to your company’s own debt-to-equity, so the beta reflects your capital structure rather than the comparable’s.
The leverage trade-off, and the limits
More debt isn’t free money. The WACC-versus-leverage curve captures the classic trade-off: as the debt ratio rises, the tax shield pulls the WACC down — but past a point, lenders demand higher rates and equity gets riskier as financial distress looms, pushing it back up. The low point is, in theory, the optimal capital structure. Treat that curve as illustrative rather than precise: the distress cost is a stylized model, and real optimal structures depend on industry, cash-flow stability and credit ratings. More broadly, a WACC is only ever an estimate — beta, the ERP and the risk-free rate are all judgement calls, and small changes move the discount rate and any DCF built on it. This tool is educational, not investment advice.
— Reader questions
What is WACC used for?
It’s the discount rate in a discounted-cash-flow valuation — the rate at which future free cash flows are brought back to present value. It’s also a hurdle rate: a project should clear the company’s WACC to create value. Because it sits at the heart of a DCF, an error in the WACC flows straight through to the intrinsic value.
Should I use market value or book value for the weights?
Market value. The WACC is a forward-looking opportunity cost, and investors price equity at market, not book — so market-value weights reflect the real mix of capital the company is financed with. Book weights are only a fallback when market values genuinely aren’t available, and they typically understate the cost of equity.
Why is the cost of debt taken after tax?
Because interest payments are tax-deductible, so each rupee of interest saves the company tax. The after-tax cost is the pre-tax rate times (1 − tax rate): an 8% rate at a 25% tax rate is 6% after tax. This tax shield is why adding some debt lowers the WACC.
What is a country risk premium and when do I need it?
It’s an extra return investors demand for the sovereign and economic risk of operating in a particular country, added to the cost of equity. It’s essential for emerging markets — for an Indian or other EM valuation, omitting it understates the cost of equity and overstates the company’s value.
What is Hamada relevering of beta?
A way to get a beta when you don’t have a reliable one for your company: take a comparable’s observed (levered) beta, remove the effect of its leverage to get the unlevered (asset) beta, then relever it to your own company’s debt-to-equity ratio. The result is a beta that reflects your capital structure rather than the comparable’s.