The formula and where it comes from
WACC blends the return each capital provider requires, weighted by that provider's share of total capital. It is the standard corporate finance construct found in Brealey and Myers, Principles of Corporate Finance, with the cost of equity from the capital asset pricing model. The after-tax cost of debt reflects the interest deduction; the federal corporate rate is 21% of taxable income under IRC section 11(b).
When to use it
Use it to recompute or sanity-check the discount rate behind a fair value estimate: a goodwill impairment test, an acquired intangible, or a value-in-use style cash flow model prepared by management or its valuation firm. A rate applied to after-tax cash flows should be an after-tax rate, which is what this produces. Fair value under ASC 820 reflects market participant assumptions, so the inputs should be what a market participant would use, not the entity's own financing history.
Limits
Beta, the equity risk premium and any size premium are judgments, and the output moves with each. A private company has no observed beta; practitioners relever the betas of guideline public companies to the target structure. This tool does not do that relevering, does not compute a terminal value, and does not set the discount rate for any specific engagement. Document where every input came from and its date.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the WACC formula?
WACC = E/V × Re + P/V × Rp + D/V × Rd × (1 − Tc), where E, P and D are the values of equity, preferred stock and debt, V is their sum, Re, Rp and Rd are the costs of each, and Tc is the marginal tax rate. Debt is tax-effected because interest is deductible; equity and preferred dividends are not.
How is the cost of equity calculated?
This calculator uses the capital asset pricing model: Re = risk-free rate + beta × equity risk premium, plus an optional size or company-specific premium. If your valuation specialist uses a different build-up, type the cost of equity into the override box and the CAPM inputs are ignored.
Should the weights use book value or market value?
Market values, or fair values where there is no market price. Book equity understates the weight of equity for most profitable companies. Debt at book value is a common proxy for fair value when the debt is recent or floating-rate. Target capital structure of market participants is often used instead of the entity’s actual structure when the entity is not representative.
Which tax rate goes into WACC?
The marginal rate at which interest is expected to be deducted. The federal corporate rate is 21% under IRC section 11(b). If the model includes state tax, use the blended federal and state rate. Pass-through entities need a judgment about what rate a market participant would use.
Where does WACC show up in an audit?
It is the usual discount rate for income-approach fair values used in goodwill and long-lived asset impairment tests, business combination valuations and other fair value measurements under ASC 820. The auditor tests it as part of management’s significant assumptions under AU-C 540, often with an auditor’s specialist under AU-C 620.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.