Profitability · updated October 21, 2026

What is WACC (weighted average cost of capital) and how is it calculated

WACC shows what the company pays each year for the money it works with: interest on its debt and the return its shareholders expect. It is the bar an investment has to clear to be worth it.

WACC formula

WACC=E/V × Cost of equity + D/V × Cost of debt × (1 − T)

E/V: The share of funding that comes from shareholders (market cap ÷ market cap + debt).
D/V: The share that comes from debt.
Cost of equity: The return shareholders require: the risk-free rate plus a premium for the stock's risk (based on beta).
Cost of debt: The average interest rate paid on loans.
T: The tax rate: interest lowers taxes, so debt costs less.

Worked example

A company is funded 70% by shareholders, who want 10% a year, and 30% by debt at 5% interest, with a 20% tax rate.

7%0.7 × 10%

1.2%0.3 × 5% × (1 − 0.2)

8.2%WACC

Any project that earns less than 8.2% a year destroys value for this company.

How to read WACC

Below 7%cheap funding (stable companies, low rates)

7% - 10%typical

Above 10%risky company or high interest rates

WACC rises when interest rates rise, and that lowers the fair value of every stock. That is why markets react to central bank decisions.

When WACC can fool you

An estimate, not a reported number: the cost of equity does not appear in any financial statement; it is estimated and can differ a lot from one analyst to another.

Related terms

ROIC Beta Fair value

Questions about WACC

Why does WACC matter to investors?

Because fair value is calculated by discounting future cash at the WACC. A higher WACC means a lower value today.

These explanations are for information only. They are not a recommendation to buy or sell.

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