WACC formula
WACC, the weighted average cost of capital, is the blended return a company's lenders and shareholders require. It is the cost of equity times the share of equity, plus the after-tax cost of debt times the share of debt.
- WACC
WACC = E/V × Re + D/V × Rd × (1 − t)
E is the market value of equity, D the debt and V the two together. Re and Rd are the costs of equity and debt, t the tax rate.
- Cost of equity
Re = risk-free rate + beta × equity risk premium
The capital asset pricing model (CAPM). Shareholders want the safe rate plus a premium for how much the stock moves with the market.
- After-tax cost of debt
Rd × (1 − t)
Interest is tax deductible, so each dollar of interest costs the company less than a dollar.
- Relevered beta
Levered beta = unlevered beta × (1 + (1 − t) × D/E)
Take the unlevered beta of comparable companies, then add back the risk of your company's own debt.
Inputs
Worked example
- Cost of each kind of capital
- Cost of equity4% + 1.2 × 5%
- 10%
- After-tax cost of debt6% × (1 − 25%)
- 4.5%
- Weights
- Equity3,000.0 ÷ 4,000.0
- 75%
- Debt1,000.0 ÷ 4,000.0
- 25%
- Result
- WACC75% × 10% + 25% × 4.5%
- 8.625%
- Unlevered beta1.2 ÷ (1 + (1 − 25%) × 1,000.0 ÷ 3,000.0)
- 0.96
Unlevered beta is the beta of the business with the debt taken out. It is what you take from comparable companies before relevering at your own debt.
How to calculate WACC
Five steps, with the worked example's numbers.
1. Value the equity
Use the market value: share price times diluted shares. In the example that is $50 times 60 million shares, or $3,000 million.
2. Value the debt
Use the market value of the debt if it trades, or the book value if it trades close to par. The example has $1,000 million.
3. Cost of equity
Risk-free rate plus beta times the equity risk premium. With 4%, a beta of 1.2 and a 5% premium, it is 10%.
4. Cost of debt, after tax
Take the yield the company would pay to borrow today, not the coupon on old loans. At 6% and a 25% tax rate, it is 4.5%.
5. Weight and add
Equity is 75% of the $4,000 million and debt 25%. So WACC is 75% × 10% plus 25% × 4.5%, which is 8.625%.
WACC inputs in October 2026
The worked example uses round numbers. These are the market inputs as of mid-October 2026, with where each one comes from.
- Risk-free rate5.19%October 14, 2026
The 10-year US Treasury yield, the usual risk-free rate for US dollar cash flows.
FRED, series DGS10- Equity risk premium4.20%October 1, 2026
Aswath Damodaran's implied premium for the S&P 500 (trailing 12 months, adjusted payout), updated each month.
Damodaran, NYU Stern- US federal tax rate21%In force since 2018
The federal corporate rate. Add state taxes for the marginal rate, which is why models often use about 25%.
26 U.S.C. § 11(b)
With these two market inputs, the example company's cost of equity is 5.19% + 1.2 × 4.2% = 10.23%, and its WACC rises from 8.625% to 8.8%, keeping its 6% cost of debt.
Explain WACC out loud
Interviewers ask for the formula, then why debt is taxed, why market values and what happens with more debt. Practice the answer with an AI interviewer.
Questions people ask
Why use market values and not book values?
WACC is the return investors require today, on what their stake is worth today. Book equity is an accounting figure and can be far from the market cap. For debt, book value is fine when the loans trade near par.
Why is the cost of debt multiplied by one minus the tax rate?
Interest is deducted before tax, so it lowers the tax bill. At 6% and a 25% tax rate, $100 of debt costs $6 of interest but saves $1.50 of tax, so the real cost is 4.5%.
What is a good WACC?
There isn't one number. It depends on interest rates, the business's risk and how it is funded. With a 10-year Treasury near 5.2% in October 2026, the example company comes out near 8.8%. A riskier business with a higher beta comes out higher.
Does more debt always lower WACC?
Only up to a point. Debt is cheaper than equity, so swapping some in lowers WACC at first. As debt grows, lenders charge more and beta rises, which pushes the cost of equity up too. Past a point WACC rises again.
Where does preferred stock go?
Give it its own term: its share of total capital times its cost, which is the preferred dividend divided by its price. Its dividends are not tax deductible, so there is no tax adjustment.
Is WACC the same as the discount rate?
In a DCF on unlevered free cash flow, yes. Those cash flows belong to lenders and shareholders together, so they are discounted at the blended rate. Levered free cash flow belongs to shareholders only, so it is discounted at the cost of equity.