How to Calculate WACC Step by Step (With Examples)

The WACC Formula

Before walking through each step, here is the full WACC formula you will be working with:

WACC = (E/V × Re) + (D/V × Rd × (1 − Tc))

Where E is equity value, D is debt value, V is total capital (E + D), Re is the cost of equity, Rd is the pre-tax cost of debt, and Tc is the corporate tax rate. We will work through each of these one by one.

The 5 Steps to Calculate WACC

Step 1

Find the Cost of Equity (Re)

The cost of equity is the return that shareholders require for investing in the company. It is not a fixed interest rate like debt — it must be estimated. The most widely used method is the Capital Asset Pricing Model (CAPM):

Re = Rf + β × (Rm − Rf)

Where Rf is the risk-free rate (typically the 10-year US Treasury yield, currently around 4.3–4.8%), β (Beta) measures the stock's sensitivity to market movements, and (Rm − Rf) is the equity risk premium — the extra return investors expect from stocks over safe assets, typically estimated at 4.5–5.5% for the US market.

Example: If Rf = 4.5%, Beta = 1.2, and ERP = 5.0%: Re = 4.5% + 1.2 × 5.0% = 10.5%

Step 2

Find the Cost of Debt (Rd)

The cost of debt is the effective interest rate the company pays on all of its outstanding debt. Unlike equity, this is relatively straightforward to find.

For public companies, look in the annual report (10-K). Find the total interest expense on the income statement and divide by average total debt from the balance sheet. This gives the effective interest rate.

Alternatively, if the company has publicly traded bonds, you can use the current yield-to-maturity on those bonds as the cost of debt. Bloomberg, FINRA TRACE, or financial data platforms provide this.

For private companies, use the interest rate on the company's primary bank loan or credit facility, as stated in the loan agreement.

Important: This is the pre-tax cost of debt. The tax shield is applied in the WACC formula itself via the (1 − Tc) term in Step 5.

Step 3

Find the Capital Structure Weights (E/V and D/V)

WACC weights each component by its share of total capital. Always use market values, not book values from the balance sheet.

Equity (E): Market capitalisation = current share price × total shares outstanding. Find this on any financial data platform (Yahoo Finance, Bloomberg) under "Market Cap".
Debt (D): Use the market value of total interest-bearing debt. For most companies, the book value of debt is a reasonable approximation of its market value. Include short-term debt, long-term debt, and finance leases from the balance sheet.
Total Capital (V): Simply V = E + D.
Equity Weight: E/V
Debt Weight: D/V

Step 4

Find the Tax Rate (Tc)

The corporate tax rate determines the size of the tax shield on debt interest. Use the company's effective tax rate from the most recent annual report — found in the income tax footnote of the financial statements.

As a reference: the US federal corporate tax rate is 21%. With state taxes, the combined effective rate for most large US corporations is typically 23–27%. For quick estimates, 21% (federal only) is commonly used in financial models.

For pass-through entities (S-Corporations, LLCs, partnerships), use 0% since there is no corporate-level tax shield on debt.

Step 5

Plug Into the WACC Formula

Now that you have all five inputs — Re, Rd, E, D, and Tc — calculate WACC:

WACC = (E/V × Re) + (D/V × Rd × (1 − Tc))

The first term gives the equity contribution to WACC. The second term gives the after-tax debt contribution. Add them together for your final WACC.

Worked Example: Calculating WACC for a Public Company

Let us work through a complete example using realistic numbers for a mid-size US company.

Input	Value	Source
Share Price	$45.00	Yahoo Finance / Bloomberg
Shares Outstanding	80 million	Annual Report (10-K)
Equity Value (E)	$3,600M	Price × Shares
Total Debt (D)	$1,400M	Balance Sheet
Total Capital (V)	$5,000M	E + D
Equity Weight (E/V)	72.0%	3,600 / 5,000
Debt Weight (D/V)	28.0%	1,400 / 5,000
Risk-Free Rate (Rf)	4.5%	10-yr US Treasury
Beta (β)	1.10	Yahoo Finance / Bloomberg
Equity Risk Premium (ERP)	5.0%	Damodaran estimate
Cost of Equity (Re)	10.0%	4.5% + 1.10 × 5.0%
Annual Interest Expense	$91M	Income Statement
Cost of Debt (Rd)	6.5%	91 / 1,400
Corporate Tax Rate (Tc)	21%	Annual Report

Now applying the WACC formula:

WACC = (E/V × Re) + (D/V × Rd × (1 − Tc))
WACC = (72.0% × 10.0%) + (28.0% × 6.5% × (1 − 21%))
WACC = (0.720 × 0.100) + (0.280 × 0.065 × 0.790)
WACC = 7.200% + 1.441%
WACC = 8.64%

This company has a WACC of 8.64%. It must generate at least an 8.64% return on its assets to create value for all capital providers. Any investment earning above 8.64% adds value; anything below destroys it.

Where to Find Each WACC Input

Input	Best Source (Public Co.)	Best Source (Private Co.)
Risk-Free Rate	US Treasury website (treasury.gov) — current 10-yr yield	Same — use current 10-yr Treasury
Beta	Yahoo Finance, Bloomberg, or company's investor relations page	Damodaran Online industry betas (no observable beta for private companies)
Equity Risk Premium	Damodaran annual update (Implied ERP page at NYU Stern)	Same — use same ERP
Cost of Debt	Interest expense / average debt (from 10-K), or bond YTM	Loan agreement interest rate, or bank loan term sheet
Market Cap (Equity)	Share price × shares outstanding — Bloomberg, Yahoo Finance	Estimated enterprise value minus debt, or recent transaction price
Total Debt	Balance sheet — short-term + long-term debt + finance leases	Balance sheet or loan summary from company records
Tax Rate	Income tax footnote in annual report — effective tax rate	Tax return or accountant; use 0% for pass-through entities

Common Mistakes When Calculating WACC

1. Using book value instead of market value for equity. Book value (shareholders' equity on the balance sheet) is the historical cost of equity, not its current market value. For a company with a $10 share price and 100 million shares, market cap is $1 billion regardless of what the balance sheet says. Always use market value.

2. Forgetting to apply the tax shield to debt. The cost of debt in WACC is always the after-tax cost, because interest is tax-deductible. The formula already accounts for this via the (1 − Tc) term. Never apply the tax shield twice, and never use the after-tax cost of debt as the pre-tax input.

3. Using the coupon rate instead of yield to maturity for cost of debt. A bond's coupon rate is the rate it was issued at — not its current effective cost. If market interest rates have changed since the bond was issued, the yield to maturity (current market rate) is the correct measure of cost of debt.

4. Using a current year tax rate instead of a normalised rate. One-time tax events (deferred tax reversals, R&D credits, tax settlements) can distort a single year's effective tax rate significantly. For WACC, use a normalised rate — often a 3-year average effective rate, or the statutory rate if the company is in a transitional period.

5. Ignoring preferred stock. If a company has preferred stock, it must be included as a third component in WACC with its own cost (preferred dividend yield, no tax shield) and its own weight. Lumping it in with either equity or debt will give a wrong WACC. See our WACC with Preferred Stock calculator for the correct 3-component formula.

WACC for Private Companies

Calculating WACC for a private company follows the same steps, but requires adjustments because private companies face additional risk factors that public WACC formulas do not capture:

Size premium: Smaller companies are riskier and investors demand a higher return. The size premium (typically 2–8%, sourced from Duff & Phelps data) is added directly to the cost of equity.
Illiquidity premium: Private shares cannot be sold easily. An additional 2–5% is typically added to the cost of equity to compensate investors for the inability to exit quickly.
Company-specific risk premium: Key-person dependency, customer concentration, and limited operating history add idiosyncratic risk not captured by beta. This is typically 0–5% depending on the specific business.

For a complete private company WACC calculation with all three adjustments, use our Private Company WACC Calculator.

Calculate WACC Instantly

Now that you understand each step, use our free online calculator to compute WACC in seconds — no spreadsheet needed:

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