WACC calculator

A company is funded by shareholders and by lenders, and the two want different returns. The weighted average cost of capital is what the business has to earn overall to satisfy both, weighted by how much of each it uses.

Debt looks cheaper than equity for two reasons. Lenders take less risk, so they demand less, and interest is deductible, so the government pays part of it. That second effect is why only the debt leg is multiplied by one minus the tax rate.

In a DCF, this is the discount rate. It is also the hurdle a company's own projects have to clear, which is why capital allocation and cost of capital are the same conversation.

WACC = E/(D+E) x Re  +  D/(D+E) x Rd x (1 - tax)

E  = market value of equity      Re = cost of equity
D  = market value of debt        Rd = cost of debt

A company with $800m of equity at a 10% cost of equity and $200m of debt at 5%, paying 25% tax.

1. 1Equity is 80% of the capital, debt is 20%.
2. 2The equity contribution is 0.8 x 10% = 8.0%.
3. 3The after-tax cost of debt is 5% x (1 - 0.25) = 3.75%, contributing 0.2 x 3.75% = 0.75%.

• Most established companies land somewhere between 6% and 12%. A figure outside that range is usually a signal to check the inputs rather than a discovery.
• A lower WACC raises every valuation it feeds. Small changes matter more than they look: moving from 9% to 8% can lift a DCF value by a fifth.
• It is a snapshot. Cost of debt moves with rates and with the company's own credit, so a WACC from two years ago is not the one to use today.

• Using book values rather than market values for the weights. Equity in particular is usually worth far more than its balance sheet figure, and using book value overweights debt.
• Forgetting the tax shield, which overstates the cost of capital and so understates every valuation built on it.
• Using the coupon on old debt as the cost of debt. What matters is what the company would pay to borrow today.
• Applying one company-wide WACC to a business with genuinely different divisions carrying genuinely different risk.

What each of these inputs actually is, where it comes from in a filing, and where it misleads.