WACC Calculator
Free WACC calculator. Compute weighted average cost of capital from cost of equity, cost of debt, capital structure, and tax rate. Essential for DCF valuation.
Cost of Capital Calculator
Free cost of equity and cost of debt calculator using CAPM. Calculate required return on equity with risk-free rate, beta, and market premium. Building block for WACC.
10-year Treasury yield
%
Stock volatility vs market
Market return − risk-free rate
%
0% for large-cap, 2-4% for small
%
%
%
Ke =4.5%+1.2×5.5%=11.1%
Cost of Equity (Ke)
11.1%
After-Tax Cost of Debt (Kd)
4.5%
Pre-Tax Cost of Debt⧉
6%
Debt Tax Shield⧉
1.5%
Interest rate × tax rate
Equity–Debt Spread⧉
6.6%
Ke − Kd (after-tax)
Implied Market Return⧉
10%
Rf + ERP
Cost of Equity by Beta
| Beta | 0.6 | 0.8 | 1.0 | 1.2 | 1.4 | 1.6 | 1.8 | 2.0 |
|---|---|---|---|---|---|---|---|---|
| Ke | 7.8% | 8.9% | 10% | 11.1% | 12.2% | 13.3% | 14.4% | 15.5% |
Cost Comparison
Cost of Equity
11.1%
Pre-Tax Cost of Debt
6%
After-Tax Cost of Debt
4.5%
CAPM is a simplified model. Real-world cost of capital may differ due to size, liquidity, and company-specific risk factors.
Planning notes, formulas, and examples
About the Cost of Capital Calculator
Cost of capital is the minimum return a company must earn to satisfy its investors. It consists of two parts: cost of equity (what shareholders expect) and cost of debt (what lenders charge, after tax).
The Capital Asset Pricing Model (CAPM) calculates cost of equity: Ke = Risk-Free Rate + Beta × Equity Risk Premium. The higher the beta (market sensitivity), the higher the required return.
This calculator computes both Ke and Kd, compares them, and provides the inputs needed for a WACC calculation. Understanding these rates is essential for sound capital budgeting because any project that earns less than the cost of capital destroys value rather than creating it. The cost of equity reflects what shareholders expect in return for their risk, while the cost of debt reflects the after-tax interest expense on borrowings. Together, they combine into the weighted average cost of capital, which serves as the discount rate for evaluating investments, acquisitions, and internal projects.
When This Page Helps
Every investment decision depends on the cost of capital. It's the hurdle rate: projects earning more than the cost of capital create value; projects earning less destroy it. Without knowing your cost of capital, you can't do DCF analysis, evaluate projects, or optimize capital structure. It is the foundational input for virtually every corporate finance decision.
How to Use the Inputs
- Enter the current risk-free rate (10-year Treasury yield).
- Enter the company's beta (stock sensitivity to market).
- Enter the equity risk premium (historical market return minus risk-free rate).
- Enter the cost of debt (interest rate) and corporate tax rate.
- View cost of equity (CAPM), after-tax cost of debt, and the spread.
Formula used
Cost of Equity (Ke) = Rf + β × (Rm − Rf)
Cost of Debt (Kd) = Interest Rate × (1 − Tax Rate)
Equity Risk Premium (ERP) = Rm − Rf
Where Rf = risk-free rate, β = beta, Rm = expected market returnExample Calculation
Result: Cost of Equity: 11.1% | After-tax Cost of Debt: 4.5%
Ke = 4.5% + 1.2 × 5.5% = 11.1%. Kd (after-tax) = 6% × (1 − 0.25) = 4.5%. Equity costs more than debt because equity holders bear more risk and have no guaranteed payments.
Tips & Best Practices
- Use the 10-year government bond yield for the risk-free rate.
- Historical equity risk premium for US markets is ~5-6%. Use forward-looking estimates when available.
- A beta of 1.0 matches the market. Above 1.0 = more volatile, below 1.0 = less volatile.
- Startups and small companies often add a "size premium" (2-4%) to the CAPM result.
- After-tax cost of debt is lower because interest payments are tax-deductible.
- If the company has no debt, cost of capital = cost of equity (unlevered).
Build-up Method Alternative
For companies without a public beta, the Build-up Method adds risk premiums: Ke = Rf + ERP + Size Premium + Company-Specific Premium. This is common for valuing small private businesses in litigation, estate planning, and M&A.
International Considerations
For companies in emerging markets, add a country risk premium (CRP) to CAPM: Ke = Rf + β × ERP + CRP. Country risk premiums range from 1% (developed) to 10%+ (frontier markets). Use sovereign bond spreads or Damodaran's country risk data.
The Debt Tax Shield
Interest is tax-deductible, creating a "tax shield" worth Interest × Tax Rate annually. This is why the after-tax cost of debt is lower than the stated interest rate, and why moderate leverage can actually reduce WACC and increase firm value (Modigliani-Miller with taxes).
Sources & Methodology
Last updated:
Methodology
This worksheet estimates cost of equity with the CAPM relationship `risk-free rate + beta × equity risk premium + optional size premium`. It separately computes the after-tax cost of debt from the entered interest rate and tax rate, then shows the spread between the equity and debt costs along with a simple beta-sensitivity table.
It is a building-block model rather than a full valuation opinion. The result depends entirely on the chosen beta, equity-risk-premium, tax-rate, and size-premium assumptions, and it does not infer company-specific premiums, country risk, or target capital structure automatically.
Sources
- 15.3 The Capital Asset Pricing Model (CAPM) (OpenStax Principles of Finance) — Reference for the CAPM formula used to estimate cost of equity from risk-free rate, beta, and market risk premium.
- 17.2 The Costs of Debt and Equity Capital (OpenStax Principles of Finance) — Reference for estimating cost of debt, cost of equity, and after-tax financing costs.
Frequently Asked Questions
Beta measures how much a stock's price moves relative to the overall market. Beta of 1.0 = same as market. Beta of 1.5 = 50% more volatile (if market drops 10%, stock drops ~15%). Beta of 0.7 = 30% less volatile. You can find betas on Yahoo Finance, Bloomberg, or similar services.
The historical US ERP is approximately 5-6% (stocks returned ~10%, bonds ~4%). However, forward-looking estimates vary from 4-7%. Professor Aswath Damodaran publishes updated ERP estimates annually. Use a consistent source for comparability.
Equity holders are last in line during bankruptcy — they bear the most risk. Debt holders have legal claims to interest and principal. Additionally, interest payments are tax-deductible, further reducing the effective cost of debt. This risk/priority difference is why equity always costs more.
Yes, but since private companies don't have a traded beta, you use "unlevered betas" from comparable public companies, then re-lever for your company's capital structure. Also add a size premium (2-6%) and potentially an illiquidity premium (1-3%).
For large US companies: cost of equity 8-12%, after-tax cost of debt 3-5%, WACC 7-10%. For smaller/riskier companies: WACC 12-20%. Startups may have implied costs of capital of 25-50%+ reflecting extreme risk.
WACC blends the cost of equity and cost of debt, weighted by their proportions in the capital structure. WACC = (E/V) × Ke + (D/V) × Kd × (1 − T). It gives Ke and Kd; plug them into our WACC calculator for the complete picture.
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