The WACC formula
WACC blends two costs, each weighted by how much of the company it finances:
WACC = E/V × cost of equity + D/V × cost of debt × (1 − tax rate)
- E is the market value of equity (share price × shares outstanding).
- D is the market value of interest-bearing debt: loans, bonds, and usually leases.
- V = D + E, so the two weights always add up to 100%.
- The (1 − tax rate) term exists because interest is usually tax-deductible, which makes debt cheaper after tax.
In a spreadsheet you never type WACC as one long formula. Put every input in its own cell, build the pieces, and combine them at the end. Then you can see which input drives the result and change one without breaking the others.
Worked example: WACC in a spreadsheet
Yellow cells are inputs, green cells are formulas. Type the inputs as percentages (4.2%), not as whole numbers (4.2), or every formula below will be off by a factor of 100.
| A | B | Formula in B | |
|---|---|---|---|
| 1 | Input | Value | |
| 2 | Share price ($) | 42.50 | |
| 3 | Shares outstanding (m) | 20.0 | |
| 4 | Market value of debt ($m) | 300.0 | |
| 5 | Risk-free rate | 4.2% | |
| 6 | Beta | 1.15 | |
| 7 | Equity risk premium | 5.5% | |
| 8 | Pre-tax cost of debt (yield) | 6.0% | |
| 9 | Tax rate | 25% | |
| 10 | Market value of equity E ($m) | 850.0 | =B2*B3 |
| 11 | Total capital V = D + E ($m) | 1,150.0 | =B10+B4 |
| 12 | Weight of equity E/V | 73.9% | =B10/B11 |
| 13 | Weight of debt D/V | 26.1% | =B4/B11 |
| 14 | Cost of equity (CAPM) | 10.53% | =B5+B6*B7 |
| 15 | After-tax cost of debt | 4.50% | =B8*(1-B9) |
| 16 | WACC | 8.95% | =B12*B14+B13*B15 |
Change the beta from 1.15 to 1.30 and the WACC rises to 9.56%. That is why analysts usually show a range of WACC values rather than a single number.
Step 1: the cost of equity with CAPM
Shareholders do not send you an invoice, so their required return has to be estimated. The standard tool is the capital asset pricing model:
Cost of equity = risk-free rate + beta × equity risk premium
The risk-free rate is the yield on long-term government bonds in the currency of your cash flows. Beta measures how strongly the share moves with the market: 1.0 moves with it, 1.15 a bit more. The equity risk premium is the extra return investors expect from shares over government bonds. With the inputs below, the cost of equity is 4.2% + 1.15 × 5.5% = 10.525%.
Step 2: the after-tax cost of debt
Use the rate the company would pay to borrow today, ideally the yield to maturity on its bonds or the rate on a new bank loan. The coupon on old debt is not the same thing. Then apply the tax shield: 6.0% × (1 − 25%) = 4.50%.
If the company makes losses and pays no tax, it gets no tax shield, and the after-tax cost of debt equals the pre-tax cost.
Step 3: market-value weights
The weights tell you how much of the company is financed by each source. Use market values where you have them: equity = $42.50 × 20m shares = $850m. Debt is often taken at book value from the balance sheet, because loans rarely trade and their book value is close to market value when rates have not moved much. Here V = $850m + $300m = $1,150m, so equity is 73.9% and debt 26.1% of the total.
Step 4: put it together and sanity-check
WACC = 73.9% × 10.53% + 26.1% × 4.50% = 8.95%. Two quick checks: the WACC must sit between the after-tax cost of debt and the cost of equity, and the weights must add up to exactly 100%. If either check fails, a reference is pointing to the wrong cell.
The single-cell version, if you need it, is =B10/(B10+B4)*(B5+B6*B7)+B4/(B10+B4)*B8*(1-B9). It gives the same 8.95%, but it is much harder to audit, so keep the step-by-step layout in real models.
Common mistakes
- Book value instead of market value of equity. If you used a book equity of $400m here instead of the $850m market value, the WACC would fall to 7.94%, because debt would suddenly look like almost half the funding.
- Using the coupon rate as the cost of debt. A bond issued years ago at 3% says nothing about what lenders want today. Use the current yield.
- Forgetting the tax shield, or applying it twice (once to the cost of debt and again to the cash flows).
- Counting accounts payable as debt. Only interest-bearing financing goes into D. Payables are part of working capital.
- Typing 4.2 instead of 4.2%. Excel then treats the risk-free rate as 420%.
- Using the company WACC for a riskier project. A new, riskier business line needs a higher rate than the company average.
Frequently asked questions
Is there a WACC function in Excel?
No. Excel has no built-in WACC function. You calculate the cost of equity, the after-tax cost of debt and the weights in separate cells and combine them with a normal formula such as =B12*B14+B13*B15.
Should I use book value or market value for the weights?
Market value wherever it is available. For equity that is share price times shares outstanding. For debt, book value is a common and acceptable shortcut when the debt does not trade and interest rates have not moved much.
What is a typical WACC?
It depends on the industry, the country and the interest-rate level, so there is no single normal value. Stable, low-risk businesses have lower WACCs than young or cyclical ones. Always build it from current inputs instead of copying a typical figure.
Why is the cost of debt multiplied by (1 − tax rate)?
Interest is usually deductible from taxable profit, so every dollar of interest saves tax. The after-tax cost of debt is what borrowing really costs the company.