What WACC is for
WACC blends what a company pays its shareholders and its lenders into one rate: the minimum return a project or investment has to clear before it creates value rather than destroying it. It shows up as the discount rate in a discounted-cash-flow valuation and as the hurdle rate finance teams compare a project's expected return against.
Because it mixes two very different capital sources, WACC needs three things for each: how much of the company is funded by that source (its weight), what that source costs, and, for debt only, a tax adjustment, since interest payments are deductible and dividends are not.
Cost of equity: CAPM or a number you already have
Shareholders never send an invoice for their required return, so it has to be estimated. The standard approach is CAPM: Re = Rf + β × (Rm − Rf), where Rf is the risk-free rate (typically a long-term government bond yield), β measures how much the stock swings relative to the market, and (Rm − Rf) is the equity risk premium investors demand for holding stocks over risk-free bonds.
A β above 1 amplifies market moves and raises the required return; a β below 1 (or negative, for a handful of stocks that move opposite the market) lowers it. If a company already has a cost of equity from a valuation report or analyst estimate, this calculator also accepts that number directly instead of rebuilding it from CAPM.
Cost of debt gets a tax break equity does not
Lenders quote a pre-tax rate on the debt itself. But interest expense reduces taxable income, so the money actually leaving the company is only Rd × (1 − Tc). At a 6% pre-tax rate and a 21% tax rate, the after-tax cost of debt is 6% × (1 − 0.21) = 4.74%, not the full 6%. Equity has no equivalent deduction, which is part of why debt is usually the cheaper source of capital before it drives up bankruptcy risk.
Worked example
A company has $600M in equity and $400M in debt, so V = $1,000M, giving weights of 60% equity and 40% debt. Using CAPM with a 4% risk-free rate, a beta of 1.2, and a 9% expected market return: Re = 4% + 1.2 × (9% − 4%) = 10%. Its lenders charge 6% pre-tax, and the tax rate is 21%, so the after-tax cost of debt is 4.74%.
WACC = (0.60 × 10%) + (0.40 × 4.74%) = 6.00% + 1.896% = 7.896%, which rounds to 7.90%. That is the rate this company would use to discount a new project's cash flows, or the minimum return that project needs to clear.
Use market value, not book value
The E and D in E/V and D/V should be market values: equity's market capitalization (share price × shares outstanding), not the book equity on the balance sheet, and debt at its current market price where it trades, or face value as a reasonable stand-in when it does not trade actively. Book equity reflects historical accounting entries, not what investors would pay for the company today, so mixing book equity with market debt (or the reverse) skews the weights and the resulting WACC.