What is the WACC formula?

E/V × Re + D/V × Rd × (1 − Tc). E and D are the market values of equity and debt, V is their sum, Re is the cost of equity, Rd the pre-tax cost of debt and Tc the marginal tax rate. Every term above is one of those, printed on its own line.

Why is debt multiplied by (1 − tax rate)?

Because interest is deductible and dividends are not. A company paying 6.5% on debt at a 21% tax rate gives up only 5.14% after the deduction — the government pays the rest. That gap is the tax shield, and it is the reason debt looks cheap right up until the covenants bite.

Where does the cost of equity come from?

CAPM: the risk-free rate plus beta times the equity risk premium. It is an estimate of what shareholders require, not a rate anyone is charged, which is why two analysts can produce WACCs a full point apart on the same company. Beta and the premium are the assumptions worth arguing about.

Book value or market value?

Market, for both. Book equity is the accumulated history of share issues and retained earnings and says nothing about what the equity is worth now. Book debt is closer to right, and is an acceptable stand-in where the debt is bank borrowing at floating rates rather than traded bonds.

What is WACC used for?

As the discount rate in a valuation, and as the hurdle rate for a project. A project returning less than the WACC destroys value even if it is profitable, because the capital funding it could have earned more elsewhere at the same risk.

WACC Calculator

With market value of equity 800000000 usd, market value of debt 200000000 usd, risk-free rate 4.2 %, equity beta 1.15 and 3 more fields, wacc comes to 9.45 % — cost of capital. It is reached in 9 steps, the last of which is 8.42 + 1.027, and each one is printed on the page with its numbers filled in. The formula is the one published by US SEC, not an approximation fitted to it.

Weighted average cost of capital from the equity and debt in the mix, with the cost of equity derived through CAPM.

Formula and sources checked 16 August 2026 · How we check

Market value of equity 800000000, Market value of debt 200000000, Risk-free rate 4.2, Equity beta 1.15

9.45 %

Cost of capital for the example below. Editing a field recomputes the calculator below; this figure holds the answer the page was loaded with.

It is written into the HTML rather than drawn by a script, so a search engine reading this page without running JavaScript still finds an answer.

Market value of equityusdShare price times shares outstanding — market value, not the balance sheet figure.Market value of debtusdRisk-free rate%The 10-year Treasury yield is the usual proxy.Equity betaHow much the share moves against the market. 1.0 moves with it.Equity risk premium%What equities are expected to return above the risk-free rate. 4.5–6% is the usual range.Pre-tax cost of debt%The yield the company actually borrows at, not the coupon on old paper.Marginal tax rate%

Cost of capital

9.45 %

Total capital: 800000000 + 200000000$1,000,000,000 usd
Weight of equity: 800000000 / 10000000000.8
Weight of debt: 200000000 / 10000000000.2
Cost of equity, CAPM: 4.2 + 1.15 * 5.510.525 %
After-tax cost of debt: 6.5 * (1 - 21 / 100)5.135 %
Equity contribution: 0.8 * 10.5258.42 %
Debt contribution: 0.2 * 5.1351.027 %
Weighted average cost of capital: 8.42 + 1.0279.447 %
What the tax shield is worth: 0.2 * 6.5 - 1.0270.273 %

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Worked example

$800m of equity against $200m of debt is an 80/20 mix. CAPM puts the cost of equity at 4.2 + 1.15 × 5.5 = 10.53%, and debt at 6.5% costs 5.14% after a 21% tax rate. Weighted: 8.42% + 1.03% = 9.45%. The tax deduction on the interest is worth 0.27 points of that.

How to work it out yourself

1.Weight equity and debt by market value, not book value — the balance sheet figure for equity is history.
2.Cost of equity through CAPM: risk-free rate plus beta times the equity risk premium.
3.Cost of debt is the rate the company borrows at today, cut by the tax rate because interest is deductible.
4.Multiply each cost by its weight and add. That percentage is the hurdle a project has to clear to be worth doing.

The formula

Total capital800000000 + 200000000
Weight of equity800000000 / 1000000000
Weight of debt200000000 / 1000000000
Cost of equity, CAPM4.2 + 1.15 * 5.5
After-tax cost of debt6.5 * (1 - 21 / 100)
Equity contribution0.8 * 10.525
Debt contribution0.2 * 5.135
Weighted average cost of capital8.42 + 1.027
What the tax shield is worth0.2 * 6.5 - 1.027

Source: US SEC — Investor.gov on cost of capital and discount rates, US Treasury — daily par yield curve rates

Questions people actually ask

What is the WACC formula?: E/V × Re + D/V × Rd × (1 − Tc). E and D are the market values of equity and debt, V is their sum, Re is the cost of equity, Rd the pre-tax cost of debt and Tc the marginal tax rate. Every term above is one of those, printed on its own line.
Why is debt multiplied by (1 − tax rate)?: Because interest is deductible and dividends are not. A company paying 6.5% on debt at a 21% tax rate gives up only 5.14% after the deduction — the government pays the rest. That gap is the tax shield, and it is the reason debt looks cheap right up until the covenants bite.
Where does the cost of equity come from?: CAPM: the risk-free rate plus beta times the equity risk premium. It is an estimate of what shareholders require, not a rate anyone is charged, which is why two analysts can produce WACCs a full point apart on the same company. Beta and the premium are the assumptions worth arguing about.
Book value or market value?: Market, for both. Book equity is the accumulated history of share issues and retained earnings and says nothing about what the equity is worth now. Book debt is closer to right, and is an acceptable stand-in where the debt is bank borrowing at floating rates rather than traded bonds.
What is WACC used for?: As the discount rate in a valuation, and as the hurdle rate for a project. A project returning less than the WACC destroys value even if it is profitable, because the capital funding it could have earned more elsewhere at the same risk.

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