What is WACC used for?

WACC is the required minimum rate of return a company must earn on an existing asset base to satisfy its creditors and shareholders. It is universally used as the discount rate in Discounted Cash Flow (DCF) models, capital budgeting evaluations, and M&A enterprise valuation.

Why is debt cheaper than equity in WACC?

Debt is cheaper for two reasons: 1) Debt holders have senior claim on assets during bankruptcy, making loans lower risk than equity; and 2) Interest expenses are tax-deductible under corporate tax law, creating a valuable interest tax shield (Cost of Debt × (1 - Tax Rate)).

Corporate Finance & Valuation Hurdle Rate

WACC Calculator

Compute Weighted Average Cost of Capital (WACC %), Capital Asset Pricing Model (CAPM) cost of equity, after-tax debt shields, and DCF investment discount hurdle rates.

Capital Structure & Cost Inputs

Market Value of Equity ($)

Market Value of Debt ($)

Cost of Equity (CAPM) Parameters

Risk-Free Rate (%)

Asset Beta (β)

Equity Risk Premium (%)

Cost of Debt & Corporate Taxes

Pre-Tax Debt Interest Rate (%)

Corporate Tax Rate (%)

Discount / Hurdle Rate

Weighted Average Cost of Capital (WACC)

9.47%

Annual dollar cost to service capital: $378,825/yr

Cost of Equity (Ke)

10.85%

75.0% of capital

After-Tax Cost of Debt (Kd)

5.33%

25.0% of capital

Investment Decision Rule: Any corporate capital project, acquisition, or capital expenditure must generate a Return on Invested Capital (ROIC) greater than 9.47% to create positive economic shareholder value (EVA).

WACC & CAPM Mathematical Architecture

The WACC Equation

WACC = [Weight Equity × Cost of Equity] + [Weight Debt × Cost of Debt × (1 − Tax Rate)]

Where equity and debt proportions are weighted by total enterprise capital, and debt interest provides a statutory corporate tax shield.

CAPM Cost of Equity

Cost of Equity (Ke) = Risk-Free Rate + [Beta × Equity Risk Premium (ERP)]

Because equity holders bear residual bankruptcy risk, equity capital carries a significantly higher required return than senior bank debt.

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