04 // Interactive Formula Compendium // FINANCEWACC = (E / V) · R_e + (D / V) · R_d · (1 − T_c)
Weighted Average Cost of Capital (WACC) — Corporate Hurdle Rate Sheet
The Weighted Average Cost of Capital WACC = (E/V)R_e + (D/V)R_d(1 − T_c) is the blended opportunity cost of capital required by all debt and equity holders, serving as the discount rate for unlevered Free Cash Flow to Firm (FCFF).
Formula Reference
Main Formula
WACC = (E / V) · R_e + (D / V) · R_d · (1 − T_c)
Rearranged Forms
V = E + D (Total Enterprise Market Capitalization)
After-Tax Cost of Debt = R_d · (1 − T_c) (Interest Tax Shield)
EV = Σ_{t=1..∞} FCFF_t / (1 + WACC)ᵗ (Unlevered DCF Enterprise Valuation)
Variables & Units
| Symbol | Name | Unit |
|---|---|---|
| WACC | Weighted Average Cost of Capital (%) | % |
| E | Market Value of Equity (E) | USD M |
| D | Market Value of Debt (D) | USD M |
| Re | Cost of Equity R_e (%) | % |
| Rd | Pre-Tax Cost of Debt R_d (%) | % |
| Tc | Marginal Corporate Tax Rate T_c (%) | % |
Inputs & Parameters
[USD M]
[USD M]
[%]
[%]
[%]
Calculated Result (Weighted Average Cost of Capital (%))
WACC =9.7%
Formula Notes & Background
- Compute total capital structure value V = E + D using current market values rather than historical book values.
- Multiply the pre-tax yield on debt R_d by (1 − T_c) because corporate interest payments are tax-deductible, creating a tax shield.
- Weight each capital source by its share of total enterprise capital (E/V and D/V) and sum.
Step-by-Step Examples
#1: Calculate WACC for a company with $800M market equity (R_e = 11%), $200M debt (R_d = 6%), and a 25% corporate tax rate.
E = $800M (80%)D = $200M (20%)R_e = 11.0%R_d = 6.0%T_c = 25%
WACC = 0.80 × 11.0% + 0.20 × 6.0% × (1 − 0.25) = 8.80% + 0.90%
→ WACC = 9.70%
#2: Find the Enterprise Value of a stable firm generating $50M/year in perpetual FCFF with 2% growth and WACC = 9.70%.
FCFF₁ = $50MWACC = 9.70%g = 2.0%
EV = 50 / (0.097 − 0.020) = 50 / 0.077
→ EV = $649.35M
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Frequently Asked Questions
Why do we multiply the cost of debt R_d by (1 − T_c) but not the cost of equity R_e?+
Interest expense is deducted from pre-tax operating income, reducing corporate income taxes by T_c per dollar of interest; dividends and buybacks paid to equity holders are not tax-deductible.
Should E and D be book values from the balance sheet or market values?+
Always use market value of equity (market cap) and market value of debt, because WACC measures the current opportunity cost of re-raising capital in public markets today.
What happens according to Modigliani-Miller Theorem when there are no taxes (T_c = 0)?+
Without taxes or bankruptcy costs, adding cheaper debt increases equity beta linearly so WACC remains completely constant regardless of leverage.