Cost of Capital (WACC) Calculator
From the weights, cost of equity, cost of debt and tax rate, compute the weighted average cost of capital (WACC).
Input Data
Results
At a glance:WACC = (E/V) x Re + (D/V) x Rd x (1 - tax rate). E/D = equity/debt market weights, V = E + D, Re = cost of equity, Rd = pretax cost of debt. The (1 - tax) reflects the debt interest tax shield (interest deductible). Example: 70% equity at 12%, 30% debt at 6% pretax, tax 16.5% → ≈9.9%. WACC is the DCF discount rate and investment hurdle. WARNING: More debt doesn't always lower WACC — high leverage raises Re and Rd; the minimum sits at the optimal capital structure, not max debt. Education, not advice.
Formula
WACC = w_e × Re + w_d × Rd × (1 − t), where w_e + w_d = 100%.
$$\text{WACC} = w_e R_e + w_d R_d (1 - t)$$How to Use
- Enter the equity and debt weights (should sum to 100%).
- Enter the cost of equity and pretax cost of debt.
- Enter the tax rate to view the WACC.
FAQ
What is the tax shield, and why does the formula use (1 - tax rate)?
Interest is deductible before tax, so each dollar of interest reduces taxable profit and saves tax of tax rate x interest. The after-tax cost of debt is Rd x (1 - tax rate). That is why WACC multiplies Rd by (1 - tax rate) — debt is cheaper after tax, one reason firms keep some leverage.
What is WACC used for?
It is the discount rate in DCF valuation and the hurdle rate for investment — projects must return above WACC to create value (positive NPV). It also benchmarks the cost of funding new projects.
Why does more debt not necessarily lower WACC?
Because more debt raises financial risk, so shareholders demand a higher Re and lenders charge a higher Rd. The cheaper-debt benefit is offset by the pricier equity and debt. The lowest WACC occurs at an 'optimal capital structure', not at maximum leverage.
Why use market values instead of book values for weights?
WACC is the current cost of capital, so it should use market values (equity market cap, debt market price) — reflecting today's true financing mix and costs. Book values are historical accounting figures and distort WACC when market prices move. If market values are unavailable, book values are a rough proxy, but state the assumption.
What is the Hong Kong tax rate to use?
Hong Kong's standard corporate profits tax (Profits Tax) is 16.5% (8.25% on the first HK$2 million of profits for eligible corporations). Use the applicable rate in the (1 - tax rate) term. The tax shield only applies to deductible interest under Hong Kong tax rules — confirm deductibility with a tax professional.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.