What is WACC (weighted average cost of capital)?

Weighted average cost of capital (WACC) is the blended rate of return a company needs to earn to satisfy both its shareholders and its lenders, weighted by how much of its funding comes from each.

In practical terms, think of WACC as the financial hurdle a business needs to clear. If a company's investments earn returns above its WACC, it's generally creating value. If they fall below it, the company may be growing revenue without actually making its shareholders better off.

"One of the simplest ways to think about WACC is as a company's cost of funding," said Jonathan Soobin Kim, CFO, US, at Raisin. "If a company consistently earns returns above its cost of funding, it's generally creating value. If it earns less, it may be growing without actually making shareholders better off."

WACC has practical implications across corporate finance, investment analysis, and risk assessment.

In corporate finance, WACC acts as a hurdle rate. Projects that generate returns above a company's WACC are creating value, and those that fall below it may be eroding it, even if they look profitable on the surface. This makes WACC a critical filter for evaluating whether a new project, acquisition, or expansion is worth pursuing.

"WACC helps distinguish between growth that creates value and growth that simply consumes capital,” explained Kim. 

WACC also plays a central role in business valuation. It's commonly used as the discount rate in discounted cash flow (DCF) analysis, which estimates the present value of a company's future cash flows. The higher the WACC, the more those future cash flows are discounted, and the lower the estimated value of the business.

Finally, WACC serves as a measure of risk. A higher WACC often indicates higher business or financial risk, while a lower WACC may suggest stable earnings, strong credit quality, or favorable borrowing conditions. For investors, this is worth considering alongside your investment horizon when evaluating a potential opportunity.

WACC is calculated by combining the cost of equity and the after-tax cost of debt, with each weighted by its share of total capital. Here’s the formula: 

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

In this formula, here’s what each metric means:

The tax adjustment on the debt side matters because interest payments on debt are often tax-deductible. This creates a tax shield that lowers the effective cost of debt relative to equity financing.

Example calculation

To see how the formula works in practice, here's a simplified example using a hypothetical company:

• Market value of equity: $600 million

• Market value of debt: $400 million

• Cost of equity: 9%

• Cost of debt: 5%

• Corporate tax rate: 25%

Calculation:

WACC = (600 / 1,000 × 9%) + (400 / 1,000 × 5% × (1 − 0.25)) WACC = 5.4% + 1.5% 

WACC = 6.9%

A WACC of 6.9% means the company needs to earn at least 6.9% on its investments to meet the expectations of its investors and lenders. Any project returning less than this would, in theory, be destroying value.

How to estimate each component

In the example above, the inputs are given. In practice, each component requires its own estimation method.

Cost of equity (Re) is commonly estimated using the Capital Asset Pricing Model (CAPM), which factors in the risk-free rate, the stock's beta (a measure of volatility relative to the market), and the expected market risk premium. Equity is generally considered riskier than debt because shareholders are paid last in bankruptcy, so equity investors typically expect higher returns.

Cost of debt (Rd) reflects the interest rate a company pays on its outstanding loans and bonds. It's often estimated using the yield to maturity on the company's existing debt, then adjusted for taxes to reflect the tax shield.

Capital structure (E and D) should be based on market values rather than book values, as market values better reflect the current economic cost of financing. Moderate debt can lower WACC due to tax benefits, but excessive leverage increases risk and borrowing costs.

A “good” WACC is relative. It depends on the industry, the company's risk profile, and prevailing market conditions. As a result, what looks high or low in one sector may be perfectly normal in another.

To illustrate the range, here are selected industry WACCs from a 2026 Cost of Capital dataset, which use a 25% marginal tax rate assumption.

WACC is straightforward in concept but easy to misapply. A few errors come up frequently when calculating or applying it:

• Using book values instead of market values. This can distort the weighting between debt and equity and produces inaccurate results.

• Ignoring the tax shield. Failing to adjust the cost of debt for taxes overstates the true cost of borrowing and inflates WACC.

• Applying a single WACC to all projects. Different projects carry different risk profiles. Using a company-wide WACC to evaluate a significantly riskier or safer project can lead to poor decisions.

• Treating WACC as static. WACC changes over time as interest rates, the company's capital structure, and market conditions shift. A WACC calculated two years ago may not be accurate today.

WACC is a foundational metric for evaluating whether a company or project is likely to create value. It represents the minimum return required to justify the capital used to fund a business, and it plays a central role in valuation, investment analysis, and corporate decision-making.

For individual investors, understanding WACC can help you evaluate whether a company is deploying capital efficiently and whether its growth is genuinely creating shareholder value or simply consuming resources.

Investments can go down as well as up in value. Valuation models rely on assumptions that may not reflect future performance.

If you're looking for a lower-risk way to grow your savings while you build your investment knowledge, Raisin gives you access to high-yield savings accounts and CDs across multiple federally insured banks and credit unions, all from a single login.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.