Knowledge Center

Summary, forum, best practices, expert tips and information sources.

72 items • 1.533.311 visits


What is the WACC? Definition

Corporations create value for shareholders by earning a return on the invested capital that is above the cost of that capital. WACC (Weighted Average Cost of Capital) is an expression of this cost. It is used to see if value is added when certain intended investments or strategies or projects or purchases are undertaken.

WACC is expressed as a percentage, like interest. For example, if a company works with a WACC of 12%, than this means that only investments should be made and all investments should be made, that give a return higher than the WACC of 12%. 

The costs of capital for any investment, whether for an entire company or for a project, is the rate of return which capital providers would want to receive if they would invest their capital elsewhere. In other words, costs of capital are a type of opportunity cost.

Calculation of WACC. Formula

The easy part of WACC is its debt part. In most cases it is clear how much a company has to pay their bankers or bond holders for debt finance. More difficult however, is the cost of equity finance. Normally, the cost of equity capital is higher than the cost debt finance, because equity involve a risk premium. See also: Cost of Capital.

Factors that make calculating WACC difficult:

  1. Calculating this risk premium is one thing that makes the calculation of WACC complicated.
  2. Another important complication is which mix of debt and equity should be used to maximize shareholder value. This is what "Weighted" means in WACC.
  3. Finally: also the corporate tax rate is important, because normally interest payments are tax deductible.

The WACC formula:

       Debt / TF (cost of debt)(1-Tax)

+     Equity / TF (cost of equity)



In this formula,

  • TF means Total Financing. Total Financing consists of the sum of the market values of debt and equity finance. An important issue with TF is whether, and under what circumstances, it should include current liabilities, such as trade credit. In valuing a company this is relevant, because:
    • Trade credit is used aggressively by many companies.
    • There is an interest (or financing) charge for such use.
    • Trade credit can be a large amount on the balance sheet.
  • Tax stands for the corporate tax rate.

Example of WACC calculation.

Suppose the following situation in a company:

The market value of debt = €300 million
The market value of equity = €400 million
The cost of debt = 8%
The corporate tax rate = 35%
The cost of equity is 18%

The WACC of this company is:

     300 : 700 * 8% * (1-35%)

+   400 : 700 * 18%


     12,5% (WACC - Weighted Average Cost of Capital)

Special Interest Group


WACC Special Interest Group.

Special Interest Group (117 members)


New Topic

Forum about WACC.

🔥 NEW Weighted Marginal Cost of Capital
Dear Friends, kindly, I need your support to get more knowledge about Weighted Marginal Cost of Capital. What is meant w (...)
Importance of WACC for Unquoted Organisation?
What are the importances of WACC to an unquoted organisation? Thanks (...)
Why WACC? Importance
Why do firms calculate WACC?
Is it good to use individual component costs in calculating the firms' cost of capital (...)
Calculation of Relevant Risk Premium is Tricky
It's a tricky issue to calculate the most relevant risk premium required for the calculation of the WACC for a company, (...)


Best Practices

The top-rated topics about WACC. Here you will find the most valuable ideas and practical suggestions.

Calculating WACC | WACC Calculation
I have been asked to calculate the WACC using the following info: Capital structure: Ordinary shares (fully paid) :10000 (...)

Expert Tips

Advanced insights about WACC. Here you will find professional advices by experts.

Information Sources

Various sources of information regarding WACC. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.

WACC User Guide

Estimation of capital costs
The estimation of corporate capital costs is complicated by many practical issues that create numerous degrees of freedo (...)

Introduction and Calculation of WACC and its Components

Initial Understanding and Calculation of WACC and Cost of Capital, Trainings, Workshops
Establishes an initial understanding of: - Cost of Capital - Cost of Equity - Cost of Debt - WACC Includes calculat (...)

Top-9 CF Valuation Mistakes

Cost of capital, WACC, valuati
In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and es (...)

Top 9 Unnecessary and Avoidable Mistakes in Cash Flow Valuation

Current Cost of Capital, WACC, Valuation
Estimate the current cost of capital for your firm. Spreadsheet by Aswath Damodaran. (...)

Corporate Valuation for Businesses

Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing
Presentation that elaborates on corporate valuation, including the following sections: 1. Three types of value: - Book (...)

Research Links

Automatically jump to further useful sources regarding WACC.

News Videos Presentations Books More






Compare with WACC: Cost of Capital  |  Internal Rate of Return  |  Net Present ValueDiscounted Cash Flow  |  Cost of Equity

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

More Management Methods, Models and Theory

Special Interest Group

Do you have a keen interest in WACC? Become our SIG Leader


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2021 12manage - The Executive Fast Track. V15.8 - Last updated: 24-9-2021. All names ™ of their owners.