ValueWhat WACC is and why it matters
WACC, the weighted average cost of capital, is the blended price a company pays for its funding. Shareholders demand a return for the risk of owning the stock; lenders demand interest for the risk of the loan. Weight each by its share of total capital and you get the single rate that represents what the company's investors, on average, require to keep their money in the business.
It matters because it is the discount rate in a DCF valuation. Every future dollar of cash flow is divided by (1 + WACC) raised to the year it arrives. A higher WACC shrinks every future cash flow harder, so the valuation falls. The relationship is steep: a 1-point change in WACC typically moves a DCF valuation by 10-20%. Getting the discount rate roughly right is more valuable than refining a growth forecast to a second decimal place.
The CAPM cost of equity
The calculator builds the cost of equity with the Capital Asset Pricing Model:
ke = rf + beta x (market return - rf)
- Risk-free rate (rf): what you could earn with no risk, usually the 10-year government bond yield. Everything riskier has to beat this.
- Beta: how much the stock amplifies market moves. A beta of 1.1 means the stock tends to move about 10% more than the market. Published betas come from regressing past stock returns against the market; they are estimates, not constants.
- Market return: the expected long-run return of the whole market. The difference (market return - rf) is the equity risk premium, the extra reward for bearing stock-market risk.
With the defaults (4% risk-free, beta 1.1, 9% market return), the cost of equity is 4 + 1.1 x 5 = 9.5%.
The after-tax cost of debt
Debt is cheaper than it looks because interest is tax-deductible: every dollar of interest saves the company tax at the corporate rate. So the effective cost is kd x (1 - tax rate). At a 5% borrowing rate and 21% tax, the after-tax cost is 3.95%. This tax shield is also why adding moderate debt lowers WACC, up to the point where distress risk takes over.
How to pick sensible inputs
- Beta: take the published beta as a starting point, then sanity-check it against the business. A regulated utility with a published beta of 1.8 deserves skepticism; a cyclical semiconductor stock at 0.6 does too. For private companies, use the average beta of comparable public companies (an "unlevered" peer beta, relevered to your target capital structure).
- Risk-free rate: use the current 10-year government bond yield of the currency you are valuing in. It moves with interest rates, so a WACC from 2020 does not apply in 2026.
- Weights: use market values, not book values. Equity is market capitalization; debt is ideally market value, with book value of interest-bearing debt as the practical stand-in. Recalculate periodically: as the stock price moves, the equity weight moves with it.
Limitations
- CAPM is a model, not a law. Beta is backward-looking and unstable, and the "expected" market return is really a historical average dressed up as a forecast. The beta sensitivity table above shows how much this uncertainty moves your answer.
- Capital structure is not fixed. The weights assume today's mix of debt and equity persists. For companies actively deleveraging or loading up on debt, a single WACC misleads.
- It ignores financing frictions. Real distress costs, issuance costs, and the option value of unused debt capacity do not appear in the formula.
- For a full valuation, feed your result into the DCF calculator and then run a reverse DCF to check whether the market agrees with your discount rate.
Frequently asked questions
Why does debt lower the WACC?
Two reasons: lenders accept lower returns than shareholders because they get paid first, and interest payments are tax-deductible, which cuts the effective cost further. The benefit reverses if debt gets so high that bankruptcy risk spikes borrowing costs.
What is a good beta to use?
Start with the company's published beta from a finance data site, then ask whether it fits the business today. Betas drift as companies change; a firm that pivoted from hardware to software may carry a stale beta. For private firms, average the betas of similar public companies.
Should WACC change over time?
Yes, in principle. Interest rates move the risk-free rate, stock prices move the equity weight, and companies change leverage. In practice, most valuations use one current WACC and test the sensitivity, which is what the beta table above helps you do.
Can I just guess 10% for the discount rate?
You can, and many people do, but a 2-point error in WACC can swing a valuation 20-40%. Building it properly takes five minutes with this calculator and removes one of the biggest sources of hidden error in a DCF.
What is a good WACC to use in a valuation?
For large, stable companies, 7 to 10 percent is a common range. Smaller or riskier companies usually need 10 to 14 percent or more. Your WACC should reflect the company's actual cost of equity and after-tax cost of debt, not a number borrowed from a different business.