Where to Find Each Input
WACC Formula, Step by Step
- Weights: V = E + D = $600,000 + $400,000 = $1,000,000, so E/V = 60% and D/V = 40%.
- Cost of equity (CAPM): Re = Rf + β × ERP = 4.74% + 1.1 × 4.23% = 9.39%.
- After-tax cost of debt: Rd × (1 − T) = 6.5% × (1 − 0.21) = 5.135%.
- Blend: 0.60 × 9.393% + 0.40 × 5.135% = 5.636% + 2.054% = 7.69%.
The tax shield is the difference debt’s deductibility makes: 40% × 6.5% × 21% = 0.55 percentage points off the WACC.
How WACC Changes With the Inputs
Two lessons. Higher Treasury yields in October 2026, only partly offset by a slightly lower premium, lifted this company’s WACC by about 0.21 points without anything changing at the company. And adding debt does not lower WACC for free: in the 60% debt case the lender charges more, and in practice shareholders would also demand more (a higher beta), which this simple model does not do automatically.
Mistakes and Edge Cases
- Book-value weights. Equity on the balance sheet can be a fraction of market value; using it overweights debt and understates WACC.
- Mixing maturities. Pair a 10-year Treasury with a premium estimated against the 10-year (as Damodaran’s is); do not use a 3-month bill yield with a long-term premium.
- Applying the full tax shield when interest is not deductible. A loss-making company gets no current benefit, and IRC 163(j) caps the business interest deduction at 30% of adjusted taxable income for businesses above the small-business threshold. Enter a lower effective tax rate in those cases.
- One rate for every project. The company WACC fits projects of average risk; a risky expansion deserves a higher rate, a safe cost-saving project a lower one.
- Using a public-company beta for a small private firm without adjustment. Private and small companies usually carry extra risk that CAPM alone does not capture.
What This Calculator Does Not Cover
It handles one class of equity and one class of debt. Preferred stock, leases, convertible debt, country risk premiums, size premiums and levering or unlevering beta for a new capital structure are not modeled. For a valuation used in a transaction, lawsuit or tax filing, work with a credentialed valuation professional or CPA.
Frequently Asked Questions
What is WACC?
The weighted average cost of capital: the blended return a company must pay its lenders and shareholders, weighted by how much of each it uses. It is the usual hurdle rate for average-risk projects.
How do I calculate the cost of equity for WACC?
With CAPM: risk-free rate + beta × equity risk premium. With early-August 2026 inputs, 4.74% + 1.1 × 4.23% = 9.39%.
Why is the cost of debt after tax in WACC?
Interest is tax-deductible, so each dollar of interest costs the company (1 − tax rate) dollars. Equity returns get no such deduction.
What risk-free rate should I use?
Most analysts use the 10-year Treasury yield; it was 5.13% on October 21, 2026. Use the yield from the date of your valuation.
Should I use book or market values?
Market values, because they reflect what investors would pay and the returns they require today.
Is a lower WACC always better?
A lower WACC means cheaper capital, but pushing it down with heavy borrowing raises the risk of financial distress, which eventually raises both debt and equity costs.
What is the difference between WACC and IRR?
WACC is what the company’s capital costs; IRR is what a project earns. A project whose IRR exceeds the WACC has a positive NPV at that rate.
How to Use This Calculator
- Enter equity and debt — market values: market capitalization for equity, and the market or book value of debt.
- Enter the CAPM inputs — the 10-year Treasury yield, the stock’s beta and an equity risk premium (dated estimates are in the table on this page).
- Enter the cost of debt and tax rate — the company’s pre-tax borrowing rate and its combined federal and state tax rate.
- Read the results — cost of equity, after-tax cost of debt, the weights, WACC, how WACC moves if beta is 0.2 lower or higher, and the tax shield.
📚 Sources & References- [1] U.S. Treasury. Daily Treasury Par Yield Curve Rates, 10-year, Oct 21, 2026 (5.13%). home.treasury.gov
- [2] Aswath Damodaran, NYU Stern. Implied ERP on October 1, 2026 (4.20%); home page accessed Oct 2026. pages.stern.nyu.edu
- [3] Aswath Damodaran, NYU Stern. Historical implied equity risk premiums for the U.S. (accessed Oct 2026). pages.stern.nyu.edu
- [4] 26 U.S.C. 11, Tax imposed (21% corporate rate; accessed Oct 2026). www.law.cornell.edu
- [5] 26 U.S.C. 163(j), Limitation on business interest (accessed Oct 2026). www.law.cornell.edu
- [6] OpenStax. Principles of Finance, Chapter 17: How Firms Raise Capital (cost of debt and equity, WACC; 2022). openstax.org
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