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.
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.
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From CAPM
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Pre-tax interest rate
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WACC =70%×11%+30%×6%×75%=9.05%
Weighted Average Cost of Capital
9.05%
Equity Weight⧉
70%
$70,000,000.00
Debt Weight⧉
30%
$30,000,000.00
After-Tax Cost of Debt⧉
4.5%
Tax shield: 0.45%
Debt-to-Equity Ratio⧉
0.43×
Monthly debt vs income
WACC Composition
Equity 7.7%
Debt 1.35%
Capital Structure Sensitivity
| Debt % | Equity % | Ke | Kd | WACC |
|---|---|---|---|---|
| 0% | 100% | 11% | 6% | 11% |
| 10% | 90% | 11.4% | 6% | 10.71% |
| 20% | 80% | 11.8% | 6% | 10.34% |
| 30% | 70% | 12.2% | 6% | 9.89% |
| 40% | 60% | 12.6% | 6% | 9.36% |
| 50% | 50% | 13% | 7% | 9.13% |
| 60% | 40% | 13.4% | 8% | 8.96% |
| 70% | 30% | 13.8% | 9% | 8.87% |
| 80% | 20% | 14.2% | 10% | 8.84% |
✓ Estimated optimal leverage: 80% debt (WACC: 8.84%)
Leverage sensitivity uses simplified risk adjustments. Actual Ke and Kd respond non-linearly to leverage changes.
Planning notes, formulas, and examples
About the WACC Calculator
The Weighted Average Cost of Capital (WACC) blends the cost of equity and the after-tax cost of debt, weighted by their proportions in the company's capital structure. It represents the minimum return the business must earn to satisfy all capital providers.
WACC is the discount rate used in DCF valuations, the hurdle rate for project evaluation, and a key input for economic value added (EVA). A lower WACC means future cash flows are worth more today.
This calculator computes WACC, shows the impact of changing capital structure, and provides an optimal leverage analysis. WACC represents the blended cost of all capital a company uses, weighted by the proportion of debt and equity in its capital structure. Every investment or project a company undertakes should earn at least the WACC to create value for shareholders. A lower WACC means cheaper capital and a higher present value for future cash flows, which directly increases enterprise value. Optimizing capital structure to minimize WACC is one of the most impactful decisions in corporate finance.
When This Page Helps
WACC is the single most important input in DCF valuation — a 1% change in WACC can swing a company's value by 15-25%. Understanding WACC helps optimize capital structure (the debt-equity mix) to minimize cost and maximize firm value. Every CFO and financial analyst needs to know their WACC. It is the discount rate behind every DCF valuation, project appraisal, and acquisition decision the company makes.
How to Use the Inputs
- Enter equity value and cost of equity (or use our CAPM calculator).
- Enter debt value, cost of debt, and corporate tax rate.
- View WACC and the weight of each component.
- Explore how changes in leverage affect WACC.
- Use WACC as the discount rate in DCF analysis.
Formula used
WACC = (E/V) × Ke + (D/V) × Kd × (1 − T)
Where E = equity value, D = debt value, V = E + D, Ke = cost of equity, Kd = cost of debt, T = tax rateExample Calculation
Result: WACC: 9.05%
E/V = 70/100 = 70%. D/V = 30/100 = 30%. WACC = 0.70 × 11% + 0.30 × 6% × (1 − 0.25) = 7.70% + 1.35% = 9.05%. The tax deductibility of interest reduces the effective cost of debt from 6% to 4.5%.
Tips & Best Practices
- Use market values (not book values) of equity and debt for accurate weights.
- Cost of equity is always higher than cost of debt due to equity risk.
- The tax shield from debt reduces WACC, but too much debt increases financial risk and raises both Ke and Kd.
- WACC should be recalculated whenever capital structure changes significantly.
- For project-specific decisions, use a project-specific WACC if the project's risk differs from the company average.
- Compare WACC to ROA — if ROA > WACC, the company is creating value.
Optimal Capital Structure
The Modigliani-Miller theorem (with taxes) suggests firms should use 100% debt to minimize WACC. In practice, agency costs, bankruptcy risk, and financial flexibility create an optimal debt ratio. Most companies target 20-40% debt.
WACC for Private Companies
Private companies face challenges: no market cap for equity weight, no traded beta for CAPM. Use comparable public company betas (unlevered, then re-levered), and estimate equity value from recent transactions or earnings multiples. Add a private company premium to cost of equity.
Dynamic WACC
WACC changes over time as interest rates shift, stock prices move, and capital structure evolves. For multi-year DCF models, some analysts use a different WACC for different periods. At minimum, recalculate WACC annually.
Sources & Methodology
Last updated:
Methodology
This page computes weighted average cost of capital from the entered market values of equity and debt, the user-provided cost of equity, the pre-tax cost of debt, and the corporate tax rate. The core formula is the standard `WACC = (E/V) × Ke + (D/V) × Kd × (1 - T)` with debt and equity weights derived from the entered capital structure.
The headline WACC is formula-based, but the leverage-sensitivity table is illustrative. It applies simplified assumptions about how cost of equity and cost of debt rise as debt percentage increases, so it should be used as a planning view rather than a precise target-capital-structure recommendation.
Sources
- 17.3 Calculating the Weighted Average Cost of Capital (OpenStax Principles of Finance) — Reference for the standard WACC formula, capital-structure weights, and after-tax debt treatment.
- 17.4 Capital Structure Choices (OpenStax Principles of Finance) — Reference for how leverage changes can affect the cost of debt, cost of equity, and the interpretation of WACC.
Frequently Asked Questions
For large US corporations, WACC typically ranges 7-10%. High-growth tech companies: 10-15%. Regulated utilities: 5-7%. Startups: 15-25%+. The exact WACC depends on industry, capital structure, interest rates, and company risk profile.
Always use market values. Book value of equity often significantly understates its true market value. For equity: shares outstanding × stock price. For debt: market value of bonds (or book value as approximation for private companies).
Interest on debt is tax-deductible, which creates a "tax shield." The government effectively subsidizes a portion of the interest expense. After-tax cost of debt = pre-tax rate × (1 − tax rate). A 6% rate at 25% tax becomes 4.5% effectively.
Initially, adding debt reduces WACC because debt is cheaper (due to tax shield). But beyond a point, added financial risk causes both Ke and Kd to rise, increasing WACC. The "optimal capital structure" is the debt-equity mix that minimizes WACC.
WACC discounts the company's projected free cash flows to present value. A higher WACC means cash flows are discounted more heavily, resulting in a lower valuation. A 1% increase in WACC can reduce DCF value by 10-25%, making accurate WACC estimation crucial.
In theory, no. WACC should always exceed the risk-free rate because both equity and debt carry risk premiums above the risk-free rate. If your calculation shows WACC below the risk-free rate, check your inputs — something is likely incorrect.
More in this topic
DCF Valuation Calculator
Free discounted cash flow (DCF) valuation calculator. Project 5-10 years of free cash flow, calculate terminal value, and discount to present value using WACC.
Debt-to-Equity Ratio Calculator
Free debt-to-equity ratio calculator. Measure financial leverage by comparing total liabilities to shareholders' equity. Industry benchmarks and risk assessment included.