There's no universal "good" number — it depends entirely on the company's risk and industry. Stable, low-risk businesses might have a WACC around 6–8%, while volatile growth companies can be well into double digits. What matters is whether a company earns returns above its WACC; if it does, it's creating value.

Is a higher or lower WACC better?

A lower WACC is generally better for valuation, because it means cheaper funding and a gentler discount on future cash flows. But a very low WACC can also signal a low-growth, low-risk business. Context matters.

What's the difference between WACC and the cost of equity?

Cost of equity is the return shareholders alone expect. WACC blends the cost of equity with the cost of debt, weighted by how much of each the company uses. WACC is always the broader, whole-company figure.

Why is the cost of debt multiplied by (1 − tax rate)?

Because interest payments reduce a company's taxable profit, the government effectively subsidises part of the borrowing cost. The after-tax figure reflects what the debt truly costs the company.

Can I use WACC for any company?

You can estimate WACC for most public companies, since you can find their market cap, debt, and an estimate of beta. It's less reliable for companies with unusual funding, very little debt, or highly uncertain risk profiles — use it as a guide, not gospel.

What Is WACC? A Plain-English Guide to the Weighted Average Cost of Capital

WACC is the blended rate a company pays to fund itself — and the discount rate investors use to value it. Here's how to calculate it, with a worked example.

Every company is funded by two kinds of money: money from shareholders (equity) and money from lenders (debt). Each of those comes at a price. WACC — the weighted average cost of capital — is simply the blended price a company pays for all of its funding, weighted by how much of each it uses.

It sounds like a piece of corporate-finance jargon, and it is. But for an investor it's one of the most useful numbers you can learn, because WACC is the rate you use to translate a company's future profits into what they're worth today. Get WACC roughly right and your valuations make sense. Get it wrong and every number downstream is wrong with it.

This guide explains what WACC is, why it matters when you're deciding whether a stock is cheap, and exactly how to calculate it — with a full worked example. When you want to run the numbers on a real company, you can use our <a href="/financial-tools/wacc-calculator">WACC calculator</a> instead of doing it by hand.

Why WACC matters to an investor

Imagine a company will generate a stream of cash over the next ten years. That cash is worth less to you the further into the future it sits, because money in your hand today can be invested and grow. To compare future cash to today's money, you "discount" it back to the present. The rate you discount at is the WACC.

A low WACC means the company funds itself cheaply and its future cash is discounted gently — which tends to support a higher valuation. A high WACC means funding is expensive and risky, future cash gets discounted hard, and the company is worth less today. So WACC isn't an accounting curiosity; it's the dial that sets how much a business is worth. This is why you'll see it at the heart of every discounted cash flow valuation — a topic we cover in <a href="/blog/wacc-discount-rate-dcf-valuation">how to use WACC as a discount rate</a>.

The WACC formula

Here is the formula. It looks busy, but it's just a weighted average of two prices:

WACC = (E / V) × Re + (D / V) × Rd × (1 − Tc)

Breaking down each piece: E is the market value of the company's equity (its market capitalisation: share price × shares outstanding). D is the market value of the company's debt. V is total funding, simply E + D. E / V is the share of funding that comes from equity, and D / V is the share that comes from debt. Re is the cost of equity: the return shareholders expect for the risk they take, usually estimated with the CAPM model, which we explain in <a href="/blog/cost-of-equity-capm-explained">cost of equity, CAPM and beta</a>. Rd is the cost of debt: the interest rate the company pays on its borrowing. Tc is the corporate tax rate.

The one part that surprises people is (1 − Tc) on the debt side. Interest payments are tax-deductible, so debt is effectively cheaper than its headline rate. If a company borrows at 5% and pays 21% tax, its real, after-tax cost of that debt is only about 3.95%. That tax shield is why companies use some debt rather than funding everything with equity.

A worked example

Let's value the funding cost of a fictional company, TechCo. (The rates below are illustrative — when you do this for real, use current market figures.) TechCo is funded by $80 billion of equity (E) and $20 billion of debt (D), for total funding (V) of $100 billion — so equity is 80% of funding and debt is 20%. Its cost of equity (Re), using CAPM, starts from a risk-free rate of 4.0%, a beta of 1.20 (the stock is 20% more volatile than the market), and an equity risk premium of 5.0%, giving Re = 4.0% + (1.20 × 5.0%) = 10.0%. Its cost of debt (Rd) is 5.0% before tax; at a 21% tax rate the after-tax cost of debt is 5.0% × (1 − 0.21) = 3.95%.

Now blend them by their weights. The equity contribution is 0.80 × 10.0% = 8.00%, and the debt contribution is 0.20 × 3.95% = 0.79%, so WACC = 8.00% + 0.79% = 8.79%. So TechCo's weighted average cost of capital is about 8.8%. That is the rate you would use to discount TechCo's future cash flows back to today. You can reproduce this in seconds with the <a href="/financial-tools/wacc-calculator">WACC calculator</a> — change any input and watch the result move.

How the inputs change the answer

It's worth building intuition for which inputs matter most. Beta does a lot of the work: a higher beta lifts the cost of equity, and since equity is usually the biggest slice of funding, WACC rises quickly with it — riskier, more volatile businesses have higher WACCs. The mix of debt and equity matters too, because after-tax debt is cheaper than equity, so adding some debt can lower WACC, up to the point where lenders start charging more for the extra risk. And the risk-free rate shifts every company's WACC at once: when government bond yields rise, the cost of both equity and debt rises, WACCs go up across the market, and — all else equal — valuations come down. This is the mechanism behind "higher rates hurt stocks."

Common mistakes to avoid

The most common error is using book values instead of market values — use the market value of equity and debt, not the figures sitting in the balance sheet from years ago. Another is forgetting the tax shield: always apply (1 − Tc) to the cost of debt. A third is treating WACC as fixed, when it moves with interest rates, the company's risk, and its funding mix — a WACC from two years ago can be badly out of date. Finally, beware over-precision: WACC is an estimate built on other estimates, so treat 8.8% as "roughly nine percent," and always test how your valuation changes if WACC is a point higher or lower.

Putting it to work

WACC is the bridge between a company's future and its value today. Once you can estimate it, the next step is using it to actually value a business — discounting its cash flows and judging whether the market price is fair. We walk through that in <a href="/blog/wacc-discount-rate-dcf-valuation">how to use WACC as a discount rate in a DCF</a>, and if the whole topic is new to you, start with our <a href="/learn/investing-for-beginners">investing for beginners hub</a>. When you're ready to calculate it for a real company, the <a href="/financial-tools/wacc-calculator">WACC calculator</a> handles the arithmetic so you can focus on the inputs that matter.

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