Calculate after-tax weighted average cost of capital from common equity, preferred stock, debt weights, tax shield, and project-return assumptions.
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Assumptions
Weights are normalised if they do not add to 100%. Debt is tax-adjusted; common equity and preferred stock are not. Use market-value weights when available.
Result
After-tax weighted average cost of capital after normalising the entered capital mix. The project return is 1.84 pp above the hurdle.
Capital structure contribution
Common equity contributes 6.66 pp, preferred stock contributes 0 pp, and debt contributes 1.5 pp after tax.
Normalised weights: 60% equity, 0% preferred, and 40% debt.
Tax-adjusted debt formula
After-tax cost of debt: 5% × (1 − 25%) = 3.75%.
Sensitivity check
| Scenario | Assumption | WACC | Project spread |
|---|---|---|---|
| Equity cost +1 pp | Shows sensitivity to a higher required return on common equity. | 8.76% | 1.24 pp |
| Debt cost +1 pp | Shows sensitivity to higher borrowing costs before the tax shield. | 8.46% | 1.54 pp |
| Preferred cost +1 pp | Shows sensitivity to preferred-share dividend yield or issuance terms. | 8.16% | 1.84 pp |
| Tax rate -5 pp | Shows how a smaller usable tax shield raises the after-tax hurdle. | 8.26% | 1.74 pp |
Use these rows to see whether the hurdle rate is fragile before treating a project return as comfortably above the cost of capital.
Corporate Finance
The weighted average cost of capital (WACC) is the blended minimum return a company must earn on its existing assets to satisfy all capital providers — common equity investors, preferred shareholders, and debt holders. This cost of capital calculator helps you combine capital-structure weights, required returns, the after-tax cost of debt, and a project return comparison in one place.
WACC represents the opportunity cost of deploying capital in a business. It serves as the discount rate in DCF valuations and the hurdle rate for capital budgeting. Projects earning above WACC create value; those below destroy it.
The formula weights each capital source by its proportion in the capital structure and adjusts the cost of debt for the tax shield.
WACC blends equity and after-tax debt costs. When preferred stock is part of the financing mix, preferred cost is added as its own weighted component because preferred dividends are normally treated differently from tax-deductible interest.
WACC = (E/V × Ke) + (P/V × Kp) + (D/V × Kd × (1 − T))
E/V = equity weight, Ke = cost of equity, P/V = preferred stock weight, Kp = cost of preferred stock, D/V = debt weight, Kd = pre-tax cost of debt, and T = corporate tax rate.
60% equity at 11.1%, 40% debt at 5%, 25% tax rate. After-tax cost of debt = 5% × 0.75 = 3.75%. WACC = 0.6 × 11.1% + 0.4 × 3.75% = 6.66% + 1.50% = 8.16%. The example section should make the workflow concrete, so this page keeps the arithmetic tied to a plausible scenario rather than leaving the result as an abstract formula.
WACC assumes a constant capital structure and constant cost of capital, which rarely holds in practice. Market-value weights should be used rather than book values, but market values fluctuate daily. The tax shield benefit only applies when the company is profitable enough to utilise it.
A project return above the calculated cost of capital means the project clears the blended hurdle under the assumptions entered. A return below the hurdle is a warning that the project may not compensate capital providers for the risk and financing mix used in the estimate.
The spread is not a full valuation decision. It is a screening signal. A small positive spread can disappear if the cost of equity rises, borrowing costs move higher, the tax shield is not fully usable, or the project risk is higher than the company-wide capital mix suggests.
Many simple WACC calculators only ask for debt and equity. That works for companies with a plain capital structure, but preferred stock can matter when preferred dividends are a meaningful financing layer. Treating preferred stock as its own weight keeps the weighted average cost of capital closer to the real funding stack.
If the company has no preferred stock, leave the preferred weight at zero. The calculator will normalise the remaining debt and common equity weights automatically.
Cost of capital is assumption-sensitive. A one percentage point move in the cost of equity or debt can change whether a project looks attractive, especially when the project-return spread is thin.
Use the sensitivity rows to see whether the hurdle rate is robust before relying on a single WACC estimate. The tax-rate row is especially useful when the business may not fully benefit from the interest tax shield.
Frequently asked questions
Market values are theoretically correct because they reflect the current cost to investors. Book values may differ significantly, especially for equity. Use market capitalisation for equity weight and market value of debt (or book value as a proxy for investment-grade debt).
Initially WACC may fall because debt is cheaper than equity (due to the tax shield). But beyond a point, additional leverage increases financial risk, raising both the cost of equity and the cost of debt, eventually increasing WACC.
Only if the project has the same risk profile as the overall company. For projects with materially different risk, use a project-specific discount rate based on comparable-company betas.
Enterprise value = present value of future free cash flows discounted at WACC. A lower WACC increases the present value of cash flows and thus enterprise value.
For many corporate finance uses, cost of capital and WACC are used almost interchangeably because WACC is the blended cost of the company's capital providers. Strictly, cost of capital can also refer to a specific financing source, such as cost of equity or cost of debt.
Yes, if preferred stock is a meaningful part of the capital structure. Preferred stock should be weighted separately from common equity and debt because its required return and tax treatment can differ from both.
A positive spread means the project return entered is above the estimated after-tax cost of capital. That is a useful screening signal, but it should still be tested against project-specific risk, financing changes, and the reliability of the return estimate.
Users often enter approximate weights that do not add exactly to 100%. Normalising converts the entered proportions into a consistent capital mix while preserving their relative balance.
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