A WACC calculator blends the return equity holders require with the after-tax return lenders require, weighted by how much of the company each provides. The output is the minimum return a project has to clear before it adds anything to the firm's value. Below WACC, an investment can be profitable in accounting terms and still destroy value, because the capital funding it costs more than it earns.
Arb Digital publishes this in its free tools library as the input other valuation tools depend on. The DCF calculator and the NPV calculator both need a discount rate and neither invents one; this page is where that rate comes from. Note the boundary against consumer credit tools: the APR calculator prices a single borrowing arrangement including its fees, while WACC prices a whole capital structure across two different classes of investor.
What This WACC Calculator Does
It computes the weighted average cost of capital from six inputs and shows the working rather than just the answer. You supply the market value of equity and of debt, which determine the weights; a cost of equity, either built with the capital asset pricing model or entered directly; a pre-tax cost of debt; and a marginal tax rate.
The output panel separates the contribution each side makes in percentage points, because the headline WACC hides where it came from. A firm at 8.6% WACC with 87% of that coming from equity is a completely different risk proposition from one at 8.6% with half coming from debt, even though the discount rate is identical.
The tax shield row shows what the interest deduction is worth, expressed as the gap between the pre-tax and after-tax WACC. It is usually a smaller number than people expect, and seeing it separated makes debt-financing arguments easier to weigh.
How to Use It
- Use market values on both sides. Equity is share price times share count. Debt is trickier — market value if the bonds trade, book value as a workable approximation for bank debt at floating rates, and capitalised operating leases included.
- Match the risk-free rate to the horizon. A ten-year cash flow forecast pairs with a long-dated government yield, not an overnight rate. Every input on this page is yours to supply; the calculator hardcodes no market data.
- Check that beta is levered consistently. The beta in CAPM must reflect the capital structure you are weighting with. Using a peer's beta without relevering it to your own debt level produces a mismatch.
- Enter the cost of debt as a current yield. The coupon on debt issued five years ago tells you what the company pays, not what it would pay to borrow today, and only the second is a cost of capital.
- Use the marginal tax rate, not the effective one. The deduction applies at the marginal rate on the next dollar of interest.
The Formula / How It's Calculated
The core expression weights each source of capital by its share of the total:
WACC = (E ÷ V) × Ke + (D ÷ V) × Kd × (1 − t)
where E is the market value of equity, D the market value of debt, V is E + D, Ke the cost of equity, Kd the pre-tax cost of debt and t the marginal tax rate. When CAPM is selected, the cost of equity is built as Ke = risk-free rate + β × equity risk premium.
Worked example, matching the values the page loads with. Equity is $600m and debt is $200m, so total capital is $800m and the weights are 75% equity and 25% debt. The cost of equity is 4.2% + 1.15 × 5.0% = 4.2% + 5.75% = 9.95%. The after-tax cost of debt is 6.0% × (1 − 0.25) = 4.50%. Weighting them gives 0.75 × 9.95% = 7.4625 percentage points from equity and 0.25 × 4.50% = 1.1250 points from debt, so WACC is 8.59%. The pre-tax WACC, ignoring the deduction, would be 0.75 × 9.95% + 0.25 × 6.0% = 8.96%, so the tax shield is worth 0.375 percentage points — real, but far smaller than the 25% tax rate makes it sound. Aswath Damodaran's useful data sets at NYU Stern publish industry betas and costs of capital worth comparing your figure against.
Why Book Value Weights Give the Wrong Answer
This is the single most common error in a WACC build, and it is worth understanding precisely because the resulting number looks plausible.
Book equity is a historical accumulation: paid-in capital plus retained earnings minus buybacks and accumulated losses. It has no relationship to what shareholders would accept to sell today. A profitable company that has bought back stock for a decade can carry book equity of $150m against a market value of $600m — and a firm that has taken large impairments can show negative book equity while trading at a substantial market capitalisation.
Run the worked example with a book equity of $150m instead of $600m. The weights flip to 43% equity and 57% debt. WACC falls to 0.43 × 9.95% + 0.57 × 4.50% = 6.84%, nearly two full points below the correct figure. That difference cascades: a project generating 7.5% looks value-creating on the wrong number and value-destroying on the right one. In a discounted cash flow model, two points of discount rate on a ten-year forecast changes the valuation by roughly a quarter.
Debt is the more forgiving side. For floating-rate bank debt and recently issued fixed debt, book value approximates market value closely enough. The exception is distressed debt trading well below par, where book value overstates the claim, and long-dated fixed debt issued in a very different rate environment. Under IFRS the discount rate used in impairment testing is subject to similar scrutiny — IAS 36 Impairment of Assets sets out the requirement for a pre-tax rate reflecting current market assessments.
The Tax Shield Is Smaller Than It Looks
Interest is deductible and dividends are not, which is the entire basis for the claim that debt is cheap capital. The worked example puts a number on that claim: 0.375 percentage points of WACC, or about 4.2% of the discount rate. Worth having, not transformative.
Three things erode it further in practice. A company with no taxable profit gets no deduction at all, so the shield is worth zero exactly when a leveraged firm most needs it. Many jurisdictions cap interest deductibility as a share of earnings, which limits the shield precisely as leverage rises. And the shield only exists while the debt exists — a company that deleverages loses it.
The more important effect that a static WACC formula misses entirely is that both costs of capital respond to leverage. Adding debt raises the levered beta, which raises the cost of equity, and past a point it raises the cost of debt too as lenders price default risk. So the naive conclusion — that shifting weight toward the cheaper source lowers WACC indefinitely — is wrong. It lowers WACC for a while, reaches a minimum, and then rises. Nothing in this calculator finds that minimum for you, because it treats each cost as an independent input rather than a function of the weights. If you change the debt weight, you must also change beta and the cost of debt to match, or the answer is not internally consistent.
One Company Does Not Have One WACC
A firm-level WACC is the right discount rate only for a project with the same risk as the firm's existing business. Applying it uniformly is how conglomerates systematically misallocate capital.
Consider a business with a stable core operation and a speculative new venture. The firm-wide rate sits between the two true rates. Applied to the low-risk core it is too high, so genuinely good projects get rejected. Applied to the speculative venture it is too low, so the risky projects clear a bar they should not. The company ends up selecting against its safe business and toward its risky one, one decision at a time, without anyone intending it.
The standard remedy is a divisional cost of capital: take the beta of listed companies operating purely in that line, unlever it to remove their capital structure, relever it at your target structure, and rebuild the cost of equity from there. It is more work and it is the difference between a discount rate that guides allocation correctly and one that quietly distorts it.
Currency matters for the same reason. A cash flow in one currency discounted at a rate built from another currency's risk-free rate embeds an inflation differential that has nothing to do with the project. Match the currency of the risk-free rate to the currency of the cash flows, and check the result against the IRR calculator output for the same project — if IRR clears WACC by a wide margin, verify the cash flows before celebrating.
Arb Digital builds acquisition channels with measurable payback periods, so the return sits on the same scale as the hurdle rate you just calculated.
See Web Growth Services Talk to Arb DigitalCommon Mistakes to Avoid
- Weighting by book value — book equity bears no relation to market value, and using it typically understates WACC by one to two percentage points.
- Using the historical coupon as the cost of debt — the cost of capital is what the firm would pay to borrow today, not what it agreed to years ago.
- Changing the debt weight without changing beta — leverage raises the cost of equity, so moving the weights alone produces an internally inconsistent rate.
- Applying one firm-wide rate to every project — it over-rejects safe projects and under-rejects risky ones, biasing capital allocation in a single direction.
- Double-counting the tax shield — if you have already discounted at after-tax WACC, adding a separate present value of tax savings counts the same benefit twice.
Related Free Tools From Arb Digital
Feed this rate into the NPV calculator or the DCF calculator, compare it against a project's return with the IRR calculator, and check how long the capital is exposed with the payback period calculator. The beta calculator produces the CAPM input, the intrinsic value calculator uses the rate for equity valuation, and the business valuation calculator takes the multiples route to the same question. Everything else is in the free online tools hub.
Frequently Asked Questions
Market values, always. Book equity is a historical accumulation with no relationship to what the equity is worth today, and using it typically understates the equity weight badly. That pushes WACC down by one to two percentage points and makes marginal projects look acceptable.
Because interest is deductible against taxable profit, so the company's net cost of borrowing is lower than the rate it pays. Dividends carry no equivalent deduction, which is why only the debt term is adjusted. A company with no taxable profit gets no benefit at all.
No. Debt is cheaper initially, but leverage raises the levered beta and therefore the cost of equity, and past a point it raises the cost of debt as lenders price default risk. WACC falls, reaches a minimum and then rises. This calculator will not find that minimum because it treats each cost as an independent input.
Only if every project carries the same risk as the existing business. A firm-wide rate is too high for a low-risk division and too low for a speculative one, so applying it uniformly rejects good safe projects and accepts bad risky ones. Divisional rates built from industry betas are the standard fix.
One matched to the horizon and the currency of the cash flows you are discounting, which normally means a long-dated government bond yield rather than a short-term rate. This calculator supplies no market data — the rate is an input you choose and should be able to justify.
Preferred stock is a third term with its own weight and its own cost, added the same way but without a tax adjustment since preferred dividends are generally not deductible. Capitalised leases belong in the debt figure, because they are contractual obligations financed at an implicit rate.
Not quite. WACC is the cost of the capital funding the firm; a hurdle rate is the return a company chooses to require, and it is often set above WACC to allow for forecast optimism. Setting the hurdle far above WACC has its own cost, because it rejects projects that would genuinely add value.
This tool performs weighted-average arithmetic on inputs you supply. It is not investment or financial advice, and no rate on this page is a market quotation. Capital structure and discount rate decisions carry real consequences and should involve someone qualified to advise on them.
