Weighted average cost of capital

Weighted average cost of capital (WACC) is the blended required return on a firm's financing, weighting after-tax cost of debt and cost of equity by their market-value proportions.

ByHoang TruongUpdated June 30, 2026

FrameworkWACC

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A firm carries €60m of equity costing 12% and €40m of debt costing 5% pre-tax, taxed at 25%. Weighting each by its share of the €100m total: equity contributes 60% × 12% = 7.2%, and after-tax debt contributes 40% × 5% × 0.75 = 1.5%. Added together, the weighted average cost of capital is 8.7% — the minimum return the firm's assets must earn.

Where it fits

TopicCost of Capital & WACCCoreSubjectCorporate FinanceCore

The formula

LaTeX

WACC = \frac{E}{V}\,R_e + \frac{D}{V}\,R_d\,(1-T)

Variables

$E$: Market value of equity (€)
$D$: Market value of interest-bearing debt (€)
$V$: Total capital (E + D) (€)
$R_{e}$: Cost of equity (decimal)
$R_{d}$: Pre-tax cost of debt (yield to maturity) (decimal)
$T$: Corporate tax rate (decimal)

The blended minimum return a firm must earn on its assets to satisfy both debt and equity providers.

Check yourself

PracticeCORE

A firm has market-value equity of €80 million and market-value debt of €20 million. The cost of equity is 12%, the pre-tax cost of debt is 6%, and the corporate tax rate is 25%. What is the firm's WACC?

Select an answer to check your understanding.