WACC Formula: How to Calculate the Weighted Average Cost of Capital

The WACC formula calculates a company's weighted average cost of capital — the blended after-tax rate it pays for the money that finances it. It weights the cost of equity and the after-tax cost of debt by each one's share of the company's total market value. Analysts use the result as the discount rate in a discounted cash flow (DCF) valuation, because a future cash flow is only worth its face amount reduced by what the capital funding it costs.

You need WACC whenever you value a whole company or decide whether an average-risk project is worth funding. A project that returns 9 percent creates value for a firm whose capital costs 8.07 percent and destroys value for one whose capital costs 10 percent, so the quality of the inputs matters more than the algebra. The formula itself is short.

What each input means

E — market value of equity

E is the company's market capitalization: shares outstanding times the current share price. For a public company you can read it off any finance site, or compute it from the share count in the latest 10-K or 10-Q. Do not use the shareholders' equity line on the balance sheet — that is a historical accounting number, and WACC asks what the capital is worth today.

D — market value of debt

D is what the company's debt would sell for today, not what it borrowed originally. If the bonds trade publicly, use their market prices. In practice, when debt trades near its face amount, students and analysts use the book value of total debt — short-term borrowings plus long-term debt from the balance sheet — as a reasonable stand-in.

V — total capital

V is simply E plus D, the market value of everything financing the company. It exists to turn E and D into weights: E/V is the fraction of the company funded by shareholders, D/V the fraction funded by lenders, and the two always sum to 1. If your weights do not add to 1, one of the first three numbers is wrong.

Re — cost of equity

Re is the return shareholders require for holding the stock. No invoice arrives for it, so it has to be estimated — almost always with the capital asset pricing model (CAPM), which starts from the risk-free rate and adds the stock's beta times the market risk premium. Expect Re to be the largest rate in the formula: shareholders are paid last if things go wrong, so they demand more than lenders do.

Rd — cost of debt

Rd is the rate the company would pay if it borrowed today — the yield to maturity on its outstanding bonds, or the rate on its most recent loans. It is not the coupon printed on old bonds, which reflects conditions when the debt was issued. Rd goes into the formula as a before-tax rate; the tax adjustment happens next.

Tc — the tax rate

Tc is the company's corporate tax rate, and it appears because interest payments are tax-deductible. Every dollar of interest reduces taxable income, so the true cost of debt is only (1 − Tc) of the stated rate. This is why the debt term — and only the debt term — gets multiplied by (1 − Tc): dividends paid to shareholders are not deductible, so equity gets no such discount. You find Tc on the income statement in the 10-K — divide income tax expense by pre-tax income for the effective tax rate — or use the statutory corporate rate when one-off items distort the effective rate.

A worked example, step by step

Marisol Foods, a mid-cap packaged-food company, has 144.0 million shares outstanding trading at $47.70. Its debt has a market value of $2,671.2 million and yields 6.1 percent. The risk-free rate is 4.2 percent, the stock's beta is 1.04, the market risk premium is 5.0 percent, and the corporate tax rate is 24 percent. Each row below is one step; every number comes from the rows above it.

Marisol Foods' weighted average cost of capital is about 8.07 percent. In a DCF, that is the rate you would use to discount the company's free cash flows. Notice the shape of the answer: equity supplies 6.768 of the 8.07 points even though it is only 72 percent of the capital, while debt supplies just 1.298 points from a 28 percent share. Debt is cheaper both because lenders take less risk and because the tax deduction trims 6.1 percent down to an effective 4.636 percent.

Common mistakes

Using book values instead of market values is the most frequent error on exams. The balance sheet's shareholders' equity records what was paid in and retained historically; the market value records what that claim costs today, which is what the formula needs. For a company trading at three times book value, weighting with book equity badly understates the share of expensive equity capital and drags WACC well below the truth.

Forgetting the (1 − Tc) term overstates WACC. In the example above, skipping it would make the debt term 0.28 × 6.1% = 1.708 percent and push WACC to 8.48 percent — a 0.41-point error that flows straight into every discounted cash flow, understating the company's value.

Mixing pre-tax and after-tax rates double-counts the tax shield. Rd enters the formula before tax, and the formula applies (1 − Tc) once. If a problem hands you an after-tax cost of debt — 4.636 percent in the example — use it directly and drop the (1 − Tc) factor, or you will shield the interest from taxes twice.

Using WACC as the hurdle rate for every project is a subtler trap. WACC reflects the average risk of the company's existing business. A packaged-food company evaluating a speculative biotech venture should demand a higher rate, because discounting risky cash flows at an average-risk WACC makes bad projects look good.

By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles