What is WACC?
A business is funded by a mix of debt (loans, bonds) and equity (shareholders). Each has a cost. WACC blends them into one figure: the minimum return the business must earn to satisfy all investors.
Formula
WACC = (E/V × Re) + (D/V × Rd × (1 − T))
- E = market value of equity
- D = market value of debt
- V = E + D
- Re = cost of equity
- Rd = cost of debt
- T = corporate tax rate (interest is usually tax-deductible)
Example
A company is funded 60% by equity costing 15% and 40% by debt at 10%, with a 30% tax rate.
WACC = (0.6 × 15%) + (0.4 × 10% × 0.7) = 9% + 2.8% = 11.8%
Estimating the cost of equity
The capital asset pricing model (CAPM) is commonly used: Re = Risk-free rate + Beta × Equity risk premium. Small private businesses often add a size or company-specific premium.
How WACC is used
- Discount rate in DCF [valuations](/glossary/valuation)
- Base for a project's [hurdle rate](/glossary/hurdle-rate)
- Comparing return on invested capital (ROIC) with the cost of capital