What Is WACC? Formula, Example and How It Is Used

WACC = (equity weight × cost of equity) + (debt weight × cost of debt × (1 - tax rate)).
Debt is usually cheaper than equity, partly because interest often reduces taxable income.
Companies use WACC as a hurdle rate: projects should earn more than it.
WACC is an estimate. Small changes in the inputs can change decisions.

WACC in plain words

A company pays for its buildings, equipment and operations with money from two main sources:

Equity: money from owners and shareholders, who expect a return through dividends and a rising share value.
Debt: money from lenders and bondholders, who expect interest payments.

Neither source is free. Lenders charge interest. Shareholders expect a return, and if they do not get it they move their money elsewhere.

WACC combines these two costs into a single percentage. Think of it as the average price the company pays for each dollar of funding. If WACC is 7.5%, the business needs to earn at least 7.5% on its invested capital to satisfy everyone who funded it.

The WACC formula

WACC = (E ÷ V × Re) + (D ÷ V × Rd × (1 - T))

E = market value of equity
D = market value of debt
V = E + D, the total capital
Re = cost of equity
Rd = cost of debt, before tax
T = the company's tax rate on profits

E ÷ V and D ÷ V are the weights. They show what share of funding comes from each source, and they add up to 100%. Analysts prefer market values over accounting book values where they are available, because market values reflect what investors actually have at stake.

Cost of equity and cost of debt

Cost of debt is the easier one. It is the interest rate the company pays on its borrowing, or the rate it would pay on new borrowing.

Cost of equity is harder, because shareholders are not promised a fixed payment. It has to be estimated. A common approach starts with the return on a very safe investment, called the risk-free rate, and adds a premium for risk:

Cost of equity = risk-free rate + (beta × market risk premium)

Beta measures how much a stock tends to move compared with the overall market. A beta above 1 means bigger swings than the market. The market risk premium is the extra return investors expect from stocks over the risk-free rate.

For example, a 4% risk-free rate, a beta of 1.2 and a 5% premium give 4% + (1.2 × 5%) = 10%.

Equity almost always costs more than debt. Shareholders are paid last if the business fails, so they demand a higher return for carrying more risk.

The tax shield

In many tax systems, interest on business debt is deducted from profit before tax is calculated. That lowers the tax bill, so the real cost of debt is less than the stated interest rate. This saving is called the tax shield.

After-tax cost of debt = interest rate × (1 - tax rate)

Take $400,000 of debt at 5% with a 25% tax rate:

Interest paid: $400,000 × 5% = $20,000
Tax saved: $20,000 × 25% = $5,000
Net cost: $15,000, which is 3.75% of $400,000

The formula agrees: 5% × (1 - 0.25) = 3.75%. Payments to shareholders usually bring no such deduction, so the cost of equity is not adjusted for tax.

Worked example

A company is funded with $600,000 of equity and $400,000 of debt, for $1,000,000 in total. Equity holders expect 10%. The debt costs 5% and the tax rate is 25%.

Source	Weight	Cost	After-tax cost	Weighted cost
Equity	60%	10%	10%	6.0%
Debt	40%	5%	3.75%	1.5%
WACC	100%			7.5%

Step by step:

Equity part: 60% × 10% = 6.0%
Debt part: 40% × 5% × (1 - 0.25) = 40% × 3.75% = 1.5%
WACC: 6.0% + 1.5% = 7.5%

In dollars, the company needs to earn about $75,000 a year on its $1,000,000 of capital to meet the expectations of both groups. Try other mixes in the WACC calculator.

How WACC is used as a hurdle rate

A hurdle rate is the minimum return a project must earn to be worth doing. WACC is the most common starting point for it.

Comparing returns. With a 7.5% WACC, a project expected to return 9% a year adds value. One expected to return 6% earns less than the money costs and reduces value.
Discounting cash flows. WACC is often the discount rate in a net present value calculation. Future cash flows are converted to today's dollars at the WACC. A positive result means the project earns more than the cost of capital. See the NPV calculator.
Checking IRR. A project's internal rate of return is compared with WACC. An IRR above WACC passes the test. The guide to NPV vs IRR explains both measures, and the IRR calculator finds the rate.
Valuing a business. Analysts discount a company's expected future cash flows at its WACC to estimate what the whole business is worth.

Many companies add a margin above WACC for riskier projects, so the hurdle rate can be higher than WACC itself.

Limits of WACC

The cost of equity is an estimate. Beta and the market risk premium come from past data and judgment. Different reasonable inputs can move WACC by a point or more.
It assumes a stable funding mix. If the balance of debt and equity changes, WACC changes too.
More debt is not always cheaper. Adding debt raises the weight of the cheaper source, but it also raises risk. Lenders then charge more and shareholders expect more, which can push WACC back up.
One rate does not fit every project. A company-wide WACC reflects average risk. Using it for a much riskier project makes that project look better than it is.
Private companies lack market prices. Without a traded share price, weights and the cost of equity must be estimated from comparable businesses.
Tax benefits vary. The tax shield only has value when the company has taxable profit to offset.

WACC is best treated as a range. Test decisions at a slightly higher and lower rate to see whether the answer holds.

Try it with your own numbers

Frequently asked questions

What is a good WACC?

There is no universal good figure. A lower WACC means a company can fund itself more cheaply, which makes more projects worthwhile. Stable businesses with predictable cash flows tend to have lower WACCs than young or risky ones. WACC is most useful when compared with the returns a company earns or with similar businesses.

Why is debt cheaper than equity?

Lenders take less risk than shareholders. They receive agreed interest payments and are repaid before owners if the business fails, so they accept a lower return. Interest is also often deducted from taxable profit, which lowers its real cost. Too much debt raises the risk of default, which pushes up the cost of both sources.

Is WACC the same as the discount rate?

WACC is one common choice for the discount rate, not the only one. A discount rate is any rate used to convert future cash flows into present value. Companies often use WACC for projects with average risk and adjust the rate up or down for projects that are riskier or safer than usual.

What happens when WACC goes up?

A higher WACC means funding costs more. Future cash flows are discounted more heavily, so projects and whole businesses are worth less in present value terms. Fewer projects clear the hurdle rate. WACC can rise when interest rates climb, when investors see the business as riskier, or when the funding mix shifts toward costlier sources.

Sources and further reading

Written and reviewed by the Capital Calculators editorial team. Every figure in this guide is calculated, then checked against the calculators on this site. Read our editorial policy and methodology. Last reviewed November 15, 2026.

This guide is general education, not financial advice. Rules of thumb vary by lender, industry and country.

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