Calculate weighted average cost of capital from debt cost, equity cost, tax rate, and capital structure for investment appraisal.
WACC turns a company's financing costs into one blended discount rate: the cost of equity weighted by the equity share of capital, plus the cost of debt weighted by the debt share and multiplied by (1 minus the tax rate). The tax adjustment is the part most people get wrong. Interest payments reduce taxable profit, so debt actually costs less than its stated rate, and that shield applies only to debt, never to equity. Because the inputs are estimates, the output is an estimate too: a WACC is only as good as the equity cost and market-value weights feeding it.
A concrete input and expected output from the current implementation.
Input
Equity 60%, debt 40%, cost of equity 12%, cost of debt 6%, tax rate 25%
Expected output
WACC = 9.0%
0.60 x 12% gives 7.2% from equity. 0.40 x 6% x (1 - 0.25) gives 1.8% from after-tax debt. The two sum to 9.0%, the blended rate the company must earn on new investments.
The tool computes WACC = (E/V) x Re + (D/V) x Rd x (1 - Tc), where E and D are the market values of equity and debt, V is their sum, Re is the cost of equity, Rd the cost of debt, and Tc the corporate tax rate. Every term is entered as a percentage, and the equity and debt weights always sum to 100%, so the result is a single rate between the two costs.
Cost of equity is usually estimated with the capital asset pricing model: a risk-free rate plus beta times the market risk premium. Cost of debt is the yield the company would pay on new borrowing, not its historical coupon. Weights should reflect current market values, since balance-sheet book values can badly misstate the true capital structure.
Market values, in theory. WACC represents the return investors require on what they hold today, and market prices reflect that. Book values come from accounting history and can be badly out of line, especially for equity. Many practitioners still use book values for debt because its market price is hard to observe; the distortion is usually small since debt often trades near par.
Interest is a tax-deductible expense, while dividends and retained earnings are not. The adjustment converts the stated interest rate into its after-tax cost to the company. Equity returns are paid from already-taxed profit, so there is no shield to apply. This is why the tax rate input can move the result noticeably, and why debt looks cheaper than its coupon suggests.
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