Weighted Average Cost of Capital (WACC)

For informational and educational purposes only • Not investment advice.

Compare WACC across companies

Nvidia
WACC15.2%
Risk-Free Rate
4.7%
Cost of Equity15.3%
Equity Weight99.3%
After-Tax Cost of Debt1.7%
Debt Weight0.7%
Apple
WACC10.4%
Risk-Free Rate
4.7%
Cost of Equity10.5%
Equity Weight98.3%
After-Tax Cost of Debt3.3%
Debt Weight1.7%
Alphabet
WACC10.7%
Risk-Free Rate
4.7%
Cost of Equity10.9%
Equity Weight97.4%
After-Tax Cost of Debt1.6%
Debt Weight2.6%
Microsoft
WACC10.2%
Risk-Free Rate
4.7%
Cost of Equity10.3%
Equity Weight98.6%
After-Tax Cost of Debt4.3%
Debt Weight1.4%
Equity Risk Premium
%
Range: 2–10%

What is WACC?

Companies rely on different sources of capital to fund their operations and future growth. Some of that capital comes from shareholders who buy stock, while some comes from lenders who provide debt financing. Both groups expect to earn a return, but they do not take the same level of risk.

Shareholders usually require a higher return than lenders because equity is riskier than debt. Lenders typically receive contractual interest payments and are paid before shareholders if the company runs into financial trouble.

WACC combines the Cost of Equity and the After-Tax Cost of Debt into a single blended discount rate based on how the company is financed.

How the WACC Model Works

The WACC model estimates the required return on equity and debt, determines how much each source contributes to the company's capital structure, and combines them into a single weighted discount rate.

Estimate Cost of Equity
→
Estimate Cost of Debt
→
Determine Capital Structure
→
Calculate WACC

WACC Formula

WACC=ED+ERE+DD+ERD(1−T) \text{WACC} = \frac{E}{D+E} R_E + \frac{D}{D+E} R_D (1-T)

Key Model Assumptions

• Cost of Equity is estimated using the Capital Asset Pricing Model (CAPM).
• The Risk-Free Rate represents the return available on a nearly risk-free investment and provides the baseline for estimating the Cost of Equity.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• The Equity Risk Premium represents the additional return investors require for bearing systematic equity market risk.
• Cost of Debt is estimated from the company's Interest Expense and total debt. Trailing twelve-month (TTM) Interest Expense is used when available; otherwise, the latest annual Interest Expense is used.
• The Tax Rate is estimated from trailing twelve-month (TTM) tax data when available; otherwise, the latest annual tax data is used. If valid tax data is unavailable, a default Tax Rate is applied.
• The tax benefit of interest is reflected through the After-Tax Cost of Debt.
• Equity and debt are weighted using their relative values in the company's capital structure.
• WACC is most useful when the company's current financing structure is reasonably representative of its expected future capital structure.

Step 1 — Estimate the Cost of Equity

Cost of Equity = Risk-Free Rate + β × Equity Risk Premium
CAPM estimates the return shareholders require for bearing the company's systematic market risk.

The first component of WACC is the Cost of Equity, which represents the return shareholders require for bearing the company's systematic market risk. This is estimated using CAPM. The risk-free rate represents the return available from a low-risk government bond, while beta scales the Equity Risk Premium based on how sensitive the stock has historically been to movements in the overall market.

Step 2 — Estimate the Cost of Debt

Pre-Tax Cost of Debt = Interest Expense / Total Debt
After-Tax Cost of Debt = Pre-Tax Cost of Debt × (1 − Tax Rate)

The second component of WACC is the Cost of Debt, which estimates the company's borrowing cost. The model estimates the Pre-Tax Cost of Debt using Interest Expense and Total Debt. Trailing twelve-month (TTM) Interest Expense is used when available; otherwise, the latest annual Interest Expense is used. The Tax Rate is similarly based on TTM tax data when available, with annual data used as a fallback. Because interest expense is generally tax deductible, WACC uses the After-Tax Cost of Debt rather than the Pre-Tax Cost of Debt.

Step 3 — Determine the Capital Structure

Total Capital = Market Value of Equity + Total Debt
Equity Weight = Market Value of Equity / Total Capital
Debt Weight = Total Debt / Total Capital

WACC weights equity and debt according to their relative contribution to the company's capital structure. Equity is measured using its market value, while debt is represented by the company's total debt. These weights determine how much the Cost of Equity and After-Tax Cost of Debt contribute to the final WACC.

Step 4 — Apply the WACC Formula

WACC = Equity Weight × Cost of Equity + Debt Weight × After-Tax Cost of Debt

The final WACC is the blended return required by shareholders and lenders. A company financed primarily with equity will have a WACC driven mainly by its Cost of Equity. A company with a larger debt component will be more affected by its After-Tax Cost of Debt. WACC is commonly used as the discount rate in enterprise valuation models.