WACC Calculator

What is WACC?

WACC— the weighted average cost of capital — is the blended rate of return a company must earn to satisfy everyone who funds it: shareholders who hold equity and lenders who hold debt. Each source of money has its own cost, and WACC weights those costs by how much of each the company uses. It is the most common discount rate in valuation: in a discounted cash flow (DCF) analysis, future cash flows are discounted back to today's value at the WACC, because future cash is only worth investing for if it clears the return every investor expects.

How WACC is calculated

WACC blends the cost of every dollar of capital — equity and debt — weighted by how much of each you use. Because interest is tax-deductible, debt's effective cost is reduced by your tax rate.

• WACC = (E/V × Re) + (D/V × Rd × (1 − Tax))
• E, D = market value of equity and debt; V = E + D
• Re, Rd = cost of equity and cost of debt

A worked example

With $4M of equity at an 18% cost and $1M of debt at 8%, taxed at 21%: equity is 80% of capital, debt 20%. WACC = (0.8 × 18%) + (0.2 × 8% × 0.79) ≈ 15.7%. That's the rate you'd discount future cash flows by to value the business.

Where WACC typically lands

Because WACC prices risk, the range is wide and the answer is company-specific. Large, profitable public companies with cheap access to debt often sit between 6% and 9%. Established private businesses commonly land in the low-to-mid teens. Early-stage startups, funded almost entirely by expensive equity, frequently run 15–25% or higher. What actually matters is that your WACC is lower than the return your business earns on the capital it deploys: if a project can't beat your WACC, it destroys value instead of creating it.

How to lower your WACC

Equity is almost always dearer than debt, so the fastest way down is the capital mix: adding a sensible amount of debt pulls WACC lower, both because debt costs less and because its interest is tax-deductible. Leverage cuts both ways, though — too much debt raises the risk of financial distress, which drives up the cost of both debt and equity and can send WACC back up. Beyond the mix, WACC falls as business risk falls: steady cash flow, diversified customers, and demonstrated traction all lower the return investors demand, and refinancing existing debt at a better rate helps too.

Cost of equity vs. cost of debt

The two inputs behind WACC are estimated very differently. The cost of debt is observable — it is the interest rate you actually pay, then reduced for the tax shield. The cost of equity is an expectation, not an invoice: the return shareholders require for the risk of owning the business. It is usually estimated with the Capital Asset Pricing Model (the risk-free rate plus beta times the equity risk premium) or, for a startup, set to the target return an investor wants. It is always higher than the cost of debt because equity holders are paid last and can lose everything.

Where WACC calculations go wrong

• Using book values instead of market values. Weight equity and debt by what they are worth today, not the figures on an old balance sheet.
• Forgetting the tax shield. The cost of debt should be after-tax; skipping the (1 − tax) term overstates WACC.
• One WACC for everything. A riskier project or division deserves a higher discount rate than the company-wide average.
• A cost of equity that is too low. For an early-stage company, a single-digit cost of equity is not credible — investors are pricing in real risk of failure.

WACC is the discount rate behind the startup valuation calculator's VC and DCF logic, and it's a core input when you build credible financial projections.