Weighted Average Cost of Capital (WACC)
Calculate firm cost of capital and understand the leverage effect
Capital Structure Inputs
Key Idea: WACC is the weighted average cost of all financing sources. It's the discount rate used to value a firm's cash flows.
D/E = Debt-to-Equity Ratio
E/V = 1 / (1 + D/E) [Equity weight]
D/V = (D/E) / (1 + D/E) [Debt weight]
WACC = (E/V) x re + (D/V) x rd x (1 - t)
where: re = cost of equity, rd = cost of debt, t = tax rate
WACC Calculation Results
Equity Weight (E/V)
66.7%
Tax Shield Component
-0.30%
Tax Shield Effect: Interest payments are tax-deductible, so debt financing is cheaper after taxes. The tax shield reduces WACC slightly, creating an incentive for leverage.
CAPM: Cost of Equity Calculation
Capital Asset Pricing Model
re = rf + beta x (rm - rf)
where: rf = risk-free rate, beta = systematic risk, rm - rf = market risk premium
Levered Beta = Unlevered Beta x [1 + (1-t) x (D/E)]
(Debt increases financial risk, raising beta)
Cost of Equity (CAPM)
11.40%
WACC vs Leverage -- Interactive Chart
Shows how WACC changes as the firm increases its debt-to-equity ratio
Cost Components vs Leverage
Cost of equity increases with leverage (higher financial risk), but WACC falls initially due to tax shield
Tax Shield Analysis -- With vs Without Tax
| Scenario |
Cost of Debt (After Tax) |
Debt Component |
WACC |
| Without Tax Benefit |
6.00% |
2.00% |
10.00% |
| With Tax Benefit |
4.50% |
1.50% |
9.70% |
| Benefit per Dollar of Debt |
1.50% |
|
Intuition: When a company borrows $1, it saves taxes on the interest paid. This tax shield makes debt cheaper than it appears. The tax benefit = Cost of Debt x Tax Rate.