Cost of Capital Calculator (WACC)
Print| Equity Weight (E/V) | 0.00% |
| Debt Weight (D/V) | 0.00% |
| After-Tax Cost of Debt | 0.00% |
Every business requires capital to fund projects, expand operations, or acquire assets. Whether that financing originates from issuing common stock or taking on corporate debt, capital carries a cost. The total required return rate a firm must generate to satisfy its investors and debt holders is known as the Cost of Capital, mathematically expressed as the Weighted Average Cost of Capital (WACC).
Our free Cost of Capital Calculator determines a company’s WACC by weighting the cost of equity against the after-tax cost of debt based on market capital structure proportions.
How to Calculate Weighted Average Cost of Capital (WACC)
Calculating the overall cost of capital involves blending the cost of equity and the after-tax cost of debt proportional to their share in the firm’s total capital structure.
The WACC Formula:
WACC = ( [E / V] × Kₑ ) + ( [D / V] × K_d × (1 - T_c) )
- E: Market value of company Equity.
- D: Market value of company Debt.
- V: Total capital value (E + D).
- Kₑ: Cost of Equity (typically derived via CAPM).
- K_d: Cost of Debt (effective pre-tax interest rate on corporate debt).
- T_c: Corporate tax rate (incorporates the interest tax shield).
Step-by-Step Capital Structure Example
Imagine a enterprise has a total capital structure of $100,000,000, comprised of $60,000,000 in equity (60%) and $40,000,000 in debt (40%). The firm’s market parameters include:
- Cost of Equity (Kₑ): 10.0%
- Pre-Tax Cost of Debt (K_d): 6.0%
- Corporate Income Tax Rate (T_c): 25.0%
Let’s calculate the after-tax cost of debt and overall WACC:
After-Tax Cost of Debt = 6.0% × (1 - 0.25) = 4.50%
Equity Contribution = 60% × 10.0% = 6.00%
Debt Contribution = 40% × 4.50% = 1.80%
WACC = 6.00% + 1.80% = 7.80%
| Capital Component | Market Capitalization | Weight (E/V or D/V) | Cost Rate | Weighted Cost |
|---|---|---|---|---|
| Equity (Stockholders) | $60,000,000 | 60.0% | 10.00% | 6.00% |
| Debt (Bonds/Loans) | $40,000,000 | 40.0% | 4.50% (After-Tax) | 1.80% |
| Total Firm Capital (WACC) | $100,000,000 | 100.0% | — | 7.80% WACC |
Frequently Asked Questions (FAQ)
Why is debt financing cheaper than equity financing?
Debt is cheaper for two reasons: First, debt holders have priority claim over equity holders in bankruptcy (lowering default risk). Second, interest payments on corporate debt are tax-deductible, creating an interest tax shield that reduces net borrowing costs.
How is WACC used in DCF discounted cash flow models?
In a Discounted Cash Flow (DCF) valuation, WACC serves as the default discount rate used to calculate the Present Value (PV) of expected future Unlevered Free Cash Flows (UFCF).
What happens if a project’s return is lower than WACC?
If a proposed capital project generates a return below the company’s WACC, executing the project destroys shareholder value because the capital costs more to secure than the project yields.