The weighted average cost of capital is the discount rate for firm-level cash flows and the hurdle rate for projects of average risk. This calculator combines a CAPM cost of equity with an after-tax cost of debt using market-value weights.
How it works
Estimate the weighted average cost of capital using market-value weights, a CAPM cost of equity and an after-tax cost of debt.
Cost of equity Ke = Rf + β × ERP + specific premium
After-tax cost of debt Kd(1 − t)
WACC = E/V × Ke + D/V × Kd × (1 − t), V = E + DCommon uses
- Discount rate for DCF valuations
- Hurdle rate for capital projects
- Fairness opinions and impairment testing
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Market value of equity | $850,000,000 |
| Market value of debt | $350,000,000 |
| Risk-free rate | 4.25% |
| Equity beta (levered) | 1.15 |
| Equity risk premium | 5.5% |
| Size / specific risk premium | 0% |
| Pre-tax cost of debt | 6.75% |
| Marginal tax rate | 21% |
| WACC | 9.05% |
| Cost of equity (CAPM) | 10.58% |
| After-tax cost of debt | 5.33% |
| Debt / equity | 0.41× |
Interpreting the results
- Use market values, or target capital-structure weights, not book values.
- Match the risk-free rate to the cash-flow horizon (typically the 10- or 20-year government yield).
- Use WACC to discount free cash flow to the firm; use the cost of equity for free cash flow to equity.
Frequently asked questions
Should WACC use book or market values?
Market values are preferred because WACC represents the return investors require today on the capital they could otherwise redeploy. Book value of debt is a reasonable proxy when debt trades near par, but book equity rarely reflects market value.
Why is the cost of debt tax-adjusted?
Interest is generally tax-deductible, so the effective cost of debt to the company is the pre-tax rate multiplied by one minus the marginal tax rate. Equity returns receive no such deduction.
When should I add a size or company-specific premium?
Smaller or privately held companies often carry risks CAPM does not capture, such as limited diversification or key-person dependence. Practitioners add a size or specific-risk premium to the cost of equity, documented with a recognized data source.
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