Corporate Strategy & Capital Allocation Lab

WACC & Cost of Capital Lab

Calculate Weighted Average Cost of Capital (WACC), CAPM cost of equity, after-tax cost of debt, hurdle rates, and EVA spreads in a free strategic finance lab.

WACC Engine Capital Structure Table Corporate Finance Theory FAQ

Capital Structure Presets

Load benchmark industry cost of capital profiles.

Step 1: Configure Capital Structure & Return Benchmarks

Cost of Capital Inputs

Market cap (Share Price × Shares Outstanding).
Total interest-bearing loans and corporate bonds.
10-Year Government Treasury Yield.
Systematic market volatility risk factor.
Historical market return over risk-free rate.
Small cap or execution risk premium.
Average interest rate on debt financing.
Federal + state tax rate for interest shield.
NOPAT ÷ Total Invested Capital.
Risk adjustment above/below corporate WACC.
Corporate WACC
11.44%
90.0% Equity / 10.0% Debt
Cost of Equity (CAPM)
12.18%
After-Tax Debt: 5.14% (Pre-Tax 6.50%)
Project Hurdle Rate
12.94%
Project Risk Premium: +1.50%
EVA Spread (Value Creation)
+10.56% (+$21,120,000/yr)
High Economic Moat / Strong Value Creation

Enterprise Capital Structure & Weighted Components Table

Capital Component Market Value Capital Weight Component Cost Weighted WACC Contribution

Corporate Finance & Valuation

Principles of Capital Allocation

WACC establishes the baseline return hurdle for all corporate strategy:

  • The Baseline Hurdle: If an investment generates returns below WACC ($ ext{ROIC} < ext{WACC}$), it destroys shareholder value even if accounting net income is positive.
  • The Debt Tax Shield: Debt is generally cheaper than equity due to seniority and interest tax deductibility ($r_d imes (1 - t)$), but excessive leverage increases financial distress risk and elevates equity beta.
  • CAPM Risk Pricing: Equity holders demand higher returns for volatile, high-beta cyclical businesses ($eta > 1.0$) than for stable, non-cyclical utilities ($eta < 1.0$).
  • Economic Value Added (EVA): True economic profit equals total capital multiplied by the positive spread between ROIC and WACC.

Test competitive moats in the VRIO Framework Lab.

Mathematical Valuation Formulas

Cost of capital formulas

Cost of Equity (Re) = Rf + (β × ERP) + Specific Premium

After-Tax Cost of Debt = Rd × (1 - Tax Rate %)

WACC = (We × Re) + (Wd × Rd × (1 - t))

Project Hurdle Rate = WACC + Project Risk Premium

EVA Spread (%) = ROIC - WACC

Annual EVA ($) = Total Capital × (ROIC - WACC)

Calculate enterprise multiples in the Valuation Lab.

FAQ

WACC & cost of capital questions

What is Weighted Average Cost of Capital (WACC)?

WACC represents a company's blended average cost of financing across equity and debt, weighted by their market value proportions: WACC = (We * Re) + (Wd * Rd * (1 - Tax Rate)). It serves as the baseline discount rate for corporate investment appraisal and DCF valuation.

How is the Cost of Equity calculated using CAPM?

The Capital Asset Pricing Model (CAPM) calculates the required return on equity as: Cost of Equity = Risk-Free Rate + (Beta * Equity Risk Premium) + Size/Specific Premium.

Why is the Cost of Debt adjusted for taxes?

Interest expense on corporate debt is tax-deductible in most jurisdictions, creating an interest tax shield that reduces the true economic cost of debt: After-Tax Cost of Debt = Pre-Tax Cost of Debt * (1 - Tax Rate).

What is a hurdle rate in capital budgeting?

A hurdle rate is the minimum required rate of return that a capital investment project must achieve to be approved. It is typically equal to WACC plus or minus a project-specific risk premium.

What is Economic Value Added (EVA) spread?

The EVA spread is the difference between Return on Invested Capital (ROIC) and WACC: EVA Spread = ROIC - WACC. A positive spread indicates that the company generates returns above its cost of capital, creating economic value.

Can I export the WACC and capital structure model to CSV?

Yes. You can export complete capital structure proportions, CAPM inputs, after-tax debt costs, hurdle rates, and EVA figures as a UTF-8 CSV spreadsheet with formula defense.

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