WACC Calculator

The WACC formula combines two costs, weighted by how much of each the company uses:

WACC = (E/V) × Ke + (D/V) × Kd × (1 − T)

Where:

• E = Market value of equity (market cap)
• D = Market value of debt (total interest-bearing debt)
• V = E + D (total firm value)
• Ke = Cost of equity (typically from CAPM)
• Kd = Pre-tax cost of debt (weighted average interest rate)
• T = Corporate tax rate

The (1 − T) factor on the debt side is critical. Interest payments on debt are tax-deductible, which effectively lowers the true cost of borrowing. A company paying 6% interest with a 21% tax rate only bears 4.74% after the tax shield. This is why debt is almost always cheaper than equity, and why companies use leverage strategically.

Cost of Equity (CAPM): The most common approach is the Capital Asset Pricing Model: Ke = Rf + β × ERP, where Rf is the risk-free rate, β (beta) measures the stock's sensitivity to market movements, and ERP is the equity risk premium (the extra return investors demand for holding stocks over risk-free bonds).

The risk-free rate represents the theoretical return on an investment with zero risk of default. In practice, analysts use the yield on government bonds issued by a creditworthy sovereign (like U.S. Treasuries) as a proxy.

Which maturity to use:

• 10-year Treasury yield (most common) — This is the standard choice for DCF models because it roughly matches the duration of a typical investment horizon. As of early 2026, this sits around 4.0-4.5%.
• 20- or 30-year Treasury yield — Some analysts prefer longer maturities for very long-duration assets or infrastructure investments. The 30-year yield is typically slightly higher than the 10-year.
• Match the currency — If you're valuing a European company in euros, use the German Bund yield, not the U.S. Treasury yield. Always match the risk-free rate to the currency of the cash flows.

Common pitfall: Using a historically low risk-free rate (like near-zero rates from 2020-2021) in a current valuation. The risk-free rate should reflect today's market, not yesterday's. A WACC built on a 1% risk-free rate will dramatically overvalue a company compared to one built on 4%.

Beta (β) measures how much a stock's returns move relative to the overall market. A beta of 1.0 means the stock moves in line with the market. Above 1.0 means more volatile; below 1.0 means less volatile.

Types of beta:

• Levered beta (equity beta) — Reflects both the business risk and the financial risk from the company's debt. This is what you see quoted on financial data providers and what you plug directly into CAPM.
• Unlevered beta (asset beta) — Strips out the effect of debt to show pure business risk. Useful when comparing companies with different capital structures or when re-levering to a target capital structure.

Where to find beta:

• Yahoo Finance — The "Beta (5Y Monthly)" on the Statistics tab is the most accessible.
• Bloomberg, Capital IQ — Professional tools that let you customize the calculation window and benchmark.
• Damodaran's datasets — Free industry average betas published annually by Professor Aswath Damodaran at NYU. These are useful as cross-references.

Practical tip: If a company recently IPO'd or has limited trading history, its calculated beta may be unreliable. In these cases, use the industry median beta from comparable companies and re-lever it for the target company's capital structure.

The equity risk premium (ERP) is the extra return investors expect from holding stocks over risk-free government bonds. It's arguably the most debated input in all of finance — reasonable people disagree on the right number.

Common approaches:

• Historical average (5.0-6.5%) — Based on the long-run excess return of U.S. equities over Treasury bonds since the 1920s. Simple and widely used, but assumes the future will resemble the past.
• Implied ERP (4.0-6.0%) — Derived from current stock prices and expected earnings. Professor Damodaran publishes a monthly estimate. This is forward-looking and reflects today's market pricing.
• Survey-based (4.5-5.5%) — Based on what practitioners actually use. Most investment banks and equity research teams use 5.0-6.0%.

Our suggestion: 5.0% is a solid starting point for U.S. equities. If you're valuing a company in an emerging market, add a country risk premium (1-5% depending on the country) on top of the base ERP. The important thing is consistency — use the same ERP across all the companies you're comparing.

The pre-tax cost of debt is the average interest rate a company pays on its outstanding debt. Unlike cost of equity, which requires a model (CAPM), cost of debt is more directly observable.

Methods to estimate cost of debt:

• Interest expense / total debt — The simplest approach. Divide the annual interest expense (from the income statement) by total interest-bearing debt (from the balance sheet). This gives you the effective interest rate.
• Yield on outstanding bonds — If the company has publicly traded bonds, look at the yield-to-maturity on its longest-dated bonds. This reflects the market's current view of the company's credit risk.
• Credit rating approach — Match the company's credit rating to the average yield for bonds with that rating. An A-rated company might borrow at 4-5%, while a BB-rated company might pay 6-8%.

Remember: Debt is cheaper than equity for two reasons. First, debt holders have a senior claim on assets, so they bear less risk. Second, interest payments are tax-deductible, creating a tax shield. The WACC formula captures this with the (1 − Tax Rate) adjustment.

This is a surprisingly nuanced question. The tax rate in the WACC formula applies only to the debt tax shield — it determines how much the government subsidizes your interest payments.

Options:

• Marginal tax rate (21% in the U.S.) — The statutory corporate rate. Use this if the company is profitable and paying close to the full rate. This is the most common choice in academic models.
• Effective tax rate — The actual taxes paid divided by pre-tax income. Companies with tax credits, NOLs (net operating losses), or international operations often pay less than the marginal rate. If the company consistently pays 15% despite a 21% statutory rate, using 15% is more realistic.
• Blended approach — Use the effective rate for near-term cash flows and gradually converge to the marginal rate in the terminal period, assuming tax benefits normalize over time.

For unprofitable companies: If the company isn't paying taxes (negative pre-tax income), the debt tax shield has no value today. Some analysts use 0% until the company becomes profitable, then switch to the marginal rate. Others ignore this nuance and use the marginal rate throughout, which slightly overstates the benefit of debt.

Extremely sensitive. WACC is the single most impactful assumption in a DCF model because it compounds across every future year of cash flows and the terminal value.

Illustrative example: For a company generating $100M in free cash flow growing at 3% in perpetuity, here's how the terminal value changes:

• WACC = 8% → Terminal Value = $100M / (8% − 3%) = $2,000M
• WACC = 9% → Terminal Value = $100M / (9% − 3%) = $1,667M
• WACC = 10% → Terminal Value = $100M / (10% − 3%) = $1,429M

That's a 29% swing in value from just a 2 percentage point change in WACC. For high-growth tech companies where 70%+ of the value comes from the terminal period, the effect is even more dramatic.

This is why sensitivity analysis matters. Any good DCF model should include a sensitivity table showing fair value across a range of WACC and terminal growth rate assumptions. A single point estimate is never sufficient — you need to understand the range of outcomes.