How to Calculate WACC: Formula, Step-by-Step Example & Interview Questions

WACC (Weighted Average Cost of Capital) equals the blended rate of return a company must earn on its assets to satisfy both debt and equity holders. The formula is: WACC = (E/V) x Re + (D/V) x Rd x (1 - T), where E is equity value, D is debt value, V = E + D, Re is cost of equity, Rd is cost of debt, and T is the tax rate. It is the discount rate used in a DCF analysis.

What Is the WACC Formula?

WACC = (E / V) x Re + (D / V) x Rd x (1 - T)

| Variable | Definition | |---|---| | E | Market value of equity (share price x shares outstanding) | | D | Market value of debt (book value as proxy) | | V | E + D (total capital) | | Re | Cost of equity (typically via CAPM) | | Rd | Cost of debt (yield on existing debt or comparable bonds) | | T | Marginal corporate tax rate |

How Do You Calculate Cost of Equity Using CAPM?

Re = Rf + Beta x (Rm - Rf)

• Rf (Risk-Free Rate): 10-year U.S. Treasury yield — approximately 4.2% in 2026
• Beta: Measure of stock's volatility vs. the market — use levered beta from Bloomberg or unlevered/relevered beta from comps
• Rm - Rf (Equity Risk Premium): Historical average is 5.5%-6.5%; many banks use ~6.0%

Example: Rf = 4.2%, Beta = 1.2, ERP = 6.0% → Re = 4.2% + 1.2 x 6.0% = 11.4%

How Do You Calculate After-Tax Cost of Debt?

After-tax cost of debt = Rd x (1 - T)

If a company's pre-tax cost of debt is 5.5% and the tax rate is 25%: After-tax Rd = 5.5% x (1 - 0.25) = 4.125%

Step-by-Step WACC Example

Assume the following for a company:

| Input | Value | |---|---| | Market cap (E) | $8 billion | | Debt (D) | $2 billion | | Cost of equity (Re) | 11.4% | | Pre-tax cost of debt (Rd) | 5.5% | | Tax rate (T) | 25% |

Step 1: V = $8B + $2B = $10B

Step 2: Equity weight = $8B / $10B = 80%

Step 3: Debt weight = $2B / $10B = 20%

Step 4: WACC = (0.80 x 11.4%) + (0.20 x 5.5% x 0.75) = 9.12% + 0.825% = 9.945%

This ~10% WACC would be used as the discount rate in a DCF model for this company. You can practice this calculation with our WACC Calculator.

What WACC Interview Questions Do Banks Ask?

1. "Walk me through how you calculate WACC." (Goldman Sachs, Evercore)
2. "What happens to WACC if interest rates rise?" — Cost of equity and cost of debt both increase, so WACC rises.
3. "Why do we use market value weights, not book value?" — Market values reflect current investor expectations.
4. "What is a typical WACC range?" — Most companies fall between 7%-12%; high-risk companies may be 15%+.
5. "If a company issues more debt, what happens to WACC?" — Initially decreases (debt is cheaper than equity), but increases at high leverage due to higher Rd and beta. This connects directly to capital structure theory.

WACC is a core component of the DCF interview question. IB Flash covers WACC and other valuation concepts with timed drills in our Question Bank and DCF Calculator designed for investment banking interview preparation.