Financial
WACC formula: Weighted Average Cost of Capital with interest tax shield
Calculate corporate WACC = (E/V)*Re + (D/V)*Rd*(1 - TaxRate) to discount unlevered Free Cash Flows in DCF models.
Tax-adjust debt—never equity—and weight by Market Value
In this simplified model, interest deductions reduce debt cost only to the extent that the assumed tax shield is available. Equity cost enters without that adjustment.
Weight debt and equity costs by their market values divided by total market capital.
| Capital Component | Market Value ($M) | Weight | After-Tax Cost | Weighted Contribution |
|---|---|---|---|---|
| Common Equity (E) | 600 | 60.0% | 12.00% | 7.20% |
| Total Debt (D, 6.25% pre-tax, 20% tax) | 400 | 40.0% | 6.25% * 0.80 = 5.00% | 2.00% |
| Total Capital (V = E + D) | 1,000 | 100.0% | WACC | 9.20% (0.092) |
Full WACC and After-Tax Cost of Debt formulas
Use a justified tax-shield assumption; simply flooring or capping a rate does not model deduction limits or deferred benefits.
=LET(v, A2 + B2, ROUND((A2 / v) * C2 + (B2 / v) * D2 * (1 - E2), 4))After-tax Cost of Debt alone
Multiplies pre-tax yield on debt by (1 - MarginalTaxRate).
=ROUND(D2 * (1 - E2), 4)Inputs and interpretation
Use market-value weights, nonnegative debt/equity and positive total capital. The two-source model excludes preferred stock and other funding. The tax shield assumes interest deductibility and usable deductions; losses and legal limits may reduce or defer it. Match rate, cash-flow currency, inflation basis and project risk; a corporate WACC is not suitable for every project.
Try the example
Use the original values or change them to test your understanding.