WACC calculator

How do you calculate WACC?

The weighted average cost of capital (WACC) is the average return a business pays its investors, with each source of finance counted in proportion to its market value. For a company financed by equity and debt the formula is WACC = (E / V) x ke + (D / V) x kd x (1 - t), where E and D are the market values of equity and debt, V is their total, ke is the cost of equity, kd is the pre-tax cost of debt and t is the corporate tax rate. Preference shares add a third term, (P / V) x kp, with no tax adjustment.

In practice the answer comes in four steps: find the cost of each source, put interest on an after-tax basis, work out each source's weight from market values, then multiply and add. The calculator follows those steps in that order, and the Show the working line under the result prints each one with your numbers.

Worked example: a WACC answer set out like an exam script

The calculator opens on a company with equity worth $6,000,000 at today's share price and debt worth $3,000,000. Its cost of equity comes from CAPM: 4% + 1.2 x (10% - 4%) = 11.20%. Its debt costs 7% before tax, and at a 25% tax rate the post-tax cost is 7% x (1 - 0.25) = 5.25%.

Add $1,000,000 of preference shares costing 8% and the total becomes $10,000,000, so the weights move to 60%, 10% and 30%. The weighted costs are then 6.72% for equity, 0.80% for the preference shares and 1.575% for debt, a WACC of 9.095%. Switch on Preference shares under the inputs to see that version of the table.

How do you find the cost of equity: CAPM or the dividend growth model?

Equity has no stated interest rate, so its cost has to be estimated. The capital asset pricing model (CAPM) builds it from risk: ke = Rf + beta x (Rm - Rf). Rf is the risk-free rate, beta measures how strongly the share moves with the market as a whole, and Rm - Rf is the market premium. A beta above 1 means more systematic risk than the market and a higher required return.

The dividend growth model works from the share price instead: ke = D0 x (1 + g) / P0 + g, where D0 is the dividend just paid, g its expected yearly growth and P0 the share price without that dividend attached. A worked example in pounds: a share trades at £2.50 ex-dividend, the last dividend was £0.15 and growth is expected at 5% a year. Next year's dividend is £0.15 x 1.05 = £0.1575, so ke = £0.1575 / £2.50 + 5% = 6.30% + 5% = 11.30%.

With 20 million shares the equity is worth £50 million. Add a £20 million bank loan at 6% and a 25% tax rate, and debt costs 4.50% after tax. The weights are 71.43% and 28.57%, so WACC = 8.07% + 1.29% = 9.36%. The two models seldom agree, and a question normally makes clear which one its data supports.

Why is debt cheaper after tax, and which tax rate goes in?

In most tax systems interest is deducted before taxable profit is worked out, so every dollar of interest cuts the tax bill by the tax rate. Dividends come out of profit after tax and give no such relief. That is why the formula multiplies the cost of debt by (1 - t), and why the rate to use is the one the company actually saves on its last slice of profit. Some rates in force when this page was checked:

Between the UK and US rows only the tax rate changes, yet WACC moves by 0.09 percentage points. A company in the UAE example below pays 9% on profits above the threshold: with AED 40 million of equity costing 13% and AED 25 million of debt at 6.5% before tax, debt costs 6.5% x (1 - 0.09) = 5.915% after tax. The weights are 61.54% and 38.46%, the weighted costs 8.00% and 2.275%, and WACC is 10.275%. A loss-making company gets no immediate relief, so its debt costs the full pre-tax rate until it has profits to set the interest against.

Should WACC use market values or book values?

Market values. They show what investors would pay for each claim on the business today, which is the return they are now asking for. The balance sheet records equity at what was paid in plus retained profits, often far below what the shares are worth. In the default example, suppose share capital and reserves total $2,000,000 in the accounts while the shares are worth $6,000,000 in the market. Book weights of 40% equity and 60% debt give a WACC of 7.63%, against 9.22% at market weights, because the cheap source of finance looks far bigger than it is.

Debt has a market value too. Bonds are quoted per 100 of nominal value, so $3,000,000 of bonds trading at 95 are worth $3,000,000 x 95 / 100 = $2,850,000. A bank loan is not traded, so the amount owed stands in for its market value. Book weights are a fallback only when no market price exists.

How do you cost preference shares and the different kinds of debt?

• Preference shares: kp = fixed dividend / ex-dividend market price. There is no tax adjustment, because preference dividends are paid from profit after tax.
• A bank loan: the interest rate is the pre-tax cost, so the after-tax cost is simply rate x (1 - t).
• Irredeemable bonds: kd after tax = annual interest x (1 - t) / ex-interest market price. A 5% bond priced at $95 per $100, with 25% tax, costs $5 x 0.75 / $95 = 3.95% after tax.
• Redeemable bonds: the cost is the rate that equates today's price with the after-tax interest and the redemption payment, which is an internal rate of return. The IRR calculator finds it from those cash flows.
• Convertible bonds: cost them like redeemable bonds, taking the higher of the cash redemption and the value of the shares on conversion as the final amount.

Enter the after-tax figure from any of these by setting the tax rate to 0% and typing that cost as the pre-tax cost of debt, or keep the tax rate and enter the pre-tax yield.

How do you calculate WACC in Excel or Google Sheets?

Put the market values in one column and the after-tax costs beside them, then use SUMPRODUCT, which multiplies matching cells and adds the products. With equity and debt values in B2:B3 and their costs in C2:C3:

=SUMPRODUCT(B2:B3,C2:C3)/SUM(B2:B3)

For the default example, enter 6000000 and 3000000 in column B, =4%+1.2*(10%-4%) in C2 and =7%*(1-25%) in C3; the formula returns 9.22%. Add a row for preference shares and widen both ranges to row 4. Google Sheets accepts the same formula. SUMPRODUCT needs both ranges to be the same size, or it returns a #VALUE! error.

How does each input change WACC?

Beta and the market premium. These move the cost of equity, and with it the largest weight. On the default inputs a beta of 0.8 gives ke of 8.80% and WACC of 7.62%, while a beta of 1.6 gives ke of 13.60% and WACC of 10.82%. Dividend inputs. In the growth model, a higher dividend yield or faster growth raises ke one for one: the default dividend inputs of $0.40, a $5.00 price and 4% growth give 12.32%, and WACC of 9.96%.

Tax rate. More tax means more relief, so WACC falls as the rate rises; the chart below the result plots it. The mix of finance. On fixed costs, moving weight toward cheaper debt lowers WACC. Real costs do not stay fixed, though. As gearing rises, shareholders bear more financial risk and demand more, and lenders eventually charge more too. Theories of capital structure differ on whether that leaves a lowest-cost mix, which is a question of judgment the arithmetic here cannot settle.

Common WACC mistakes

• Taking tax off preference dividends. Only interest gets relief; kp goes in as it is.
• Forgetting tax relief on interest, or applying it twice by entering an after-tax cost and a tax rate.
• Using a cum-dividend price in the growth model. Take the dividend about to be paid off the price first.
• Using D0 where the model needs D1. The top of the fraction is next year's dividend, D0 x (1 + g).
• Weighting by nominal or book values when market prices are available.
• Valuing shares at their nominal value. A $0.50 nominal share trading at $5.00 is worth $5.00 for WACC purposes.
• Using the coupon rate as the cost of traded debt. The cost is the yield at today's price, not the interest printed on the bond.

What the WACC calculator leaves out, and a glossary

It averages the costs you enter at the weights you enter. It does not estimate beta, forecast dividend growth or find a bond's yield, and it treats the company's existing mix of finance and level of risk as the ones a new project will carry. A project that changes either needs its own discount rate. The result is a hurdle rate, not a forecast of returns; to apply it to a project's cash flows, use the NPV calculator.

Cost of capital: the return investors require for providing finance. Market value: price x quantity of shares or bonds today. Gearing: the share of debt in a company's finance. Beta: a measure of a share's systematic risk relative to the market. Ex-dividend: a share price that no longer includes the dividend about to be paid. Tax shield: the tax saved because interest is deductible.

Frequently asked questions

Courses related to the cost of capital

Sources and review