WACC & Cost of Capital Calculator

WACC stands for Weighted Average Cost of Capital. It represents the blended minimum rate of return a company must generate across its debt and equity financing to satisfy shareholders and debt holders. It serves as the standard discount rate in Discounted Cash Flow (DCF) enterprise valuations.

The formula is: WACC = (E / V × r_e) + (D / V × r_d × (1 − t)), where E is Market Value of Equity, D is Market Value of Debt, V is Total Capital (E + D), r_e is Cost of Equity, r_d is Pre-Tax Cost of Debt, and t is Corporate Tax Rate.

Under the Capital Asset Pricing Model (CAPM), Cost of Equity is: r_e = r_f + β × ERP, where r_f is the Risk-Free Rate (e.g. 10-year government bond yield), β is Equity Beta (volatility relative to the market), and ERP is Equity Risk Premium (typically 5.0% to 6.0%).

Interest paid on corporate debt is tax-deductible as an operating expense, reducing taxable corporate net income. This lowers the effective after-tax cost of debt: Post-Tax Cost of Debt = Pre-Tax Rate × (1 − Tax Rate).

Equity investors carry full residual business risk and are subordinated behind debt holders in liquidation. In exchange for this downside risk, equity holders demand a significant equity risk premium above fixed interest rates.

Introducing lower-cost, tax-shielded debt initially lowers WACC. However, excessive leverage raises bankruptcy risk, which expands equity beta and debt spreads, ultimately driving WACC higher beyond an optimal debt-to-equity ratio.