Chapter 9: WACC (Weighted Average Cost of Capital)

Cost of Debt • Cost of Equity • Capital Weights • Flotation Costs • CAPM Option
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Chapter 9
Resources & Tools Definitions & Formulas In-Class Exercise (IBM) Real-Company Examples (WACC vs ROIC) Final Exam Note Disclaimer
Instructor reminder: WACC is a hurdle rate for value-creating projects. If ROIC > WACC, the firm is (currently) earning excess returns.

Resources & Tools

Self-produced video
WACC Explained: How Companies Balance Cost, Risk & Growth
WACC Learning Game
Open game (explanation)
WACC Calculator (Annual coupon bond)
Open annual-bond calculator
WACC Calculator (Semi-annual coupon bond)
Open semiannual-bond calculator
Practical workflow: (1) compute weights, (2) compute Kd after-tax, (3) compute Ke (DDM or CAPM), (4) compute WACC.

Definitions & Formulas

Core identity
WACC = (Wd × Kd) + (We × Ke) Wd = Debt / (Debt + Equity) We = Equity / (Debt + Equity)
Cost of Debt (with flotation costs + tax shield)
Cost of debt (after-tax) = YTM × (1 − Tax rate) In Excel (annual coupon): Kd = RATE(nper, coupon, -(price − flotation $), 1000) × (1 − tax) Flotation $ = flotation % × price
  • Use the bond’s YTM as the market-based pre-tax cost of debt.
  • The tax shield reduces the effective cost: multiply by (1 − tax rate).
Cost of Equity Option 1: Dividend Growth Model (DDM)
Ke = D1 / (P0 − Flotation $) + g D1 = next period dividend P0 = current stock price g = dividend growth rate Flotation $ = flotation % × price
Cost of Equity Option 2: CAPM (if beta is given)
Ke = rf + β × (rm − rf) Ke = rf + β × (market risk premium)

In-Class Exercise

IBM WACC exercise (debt + equity financing)

Given

  • Debt financing: $10m via a 10-year bond, coupon 5%, price $950, flotation 7% of price, tax rate 40%
  • Equity financing: $20m via equity, D1=$5, P0=$50, g=5%, flotation cost=0
Solution
Step 1: Weights Wd = 10 / (10 + 20) = 1/3 We = 20 / (10 + 20) = 2/3 Step 2: Cost of Debt (after-tax) Kd = RATE(10, 0.05*1000, -(950 - 0.07*950), 1000) * (1 - 0.40) Kd ≈ 3.98% Step 3: Cost of Equity (DDM; flotation = 0) Ke = 5 / 50 + 0.05 = 0.15 = 15.00% Step 4: WACC WACC = (1/3)*3.98% + (2/3)*15.00% ≈ 11.33% (≈ 11% rounded)
Interpretation: WACC is the firm’s average required return on new investments, given its mix of debt and equity and their respective costs.

Real-Company Examples (WACC vs ROIC)

These figures are pulled from GuruFocus and can change over time as rates, betas, and market conditions update.
Company Ticker WACC (GuruFocus) ROIC (GuruFocus) Quick takeaway
Walmart WMT ~7.2% (mid-Jan 2026) ~11.30% ROIC > WACC → earning excess returns
Amazon AMZN ~12.41% (Jan 17, 2026) ~12.95% ROIC ≳ WACC → near breakeven to modest excess returns
Apple AAPL ~9.38% (current) ~38.29% ROIC ≫ WACC → strong excess returns
Source links (GuruFocus)
Optional instructor note (why WACC matters for value)
  • If a firm can invest at returns above WACC, growth tends to increase firm value.
  • If expected project returns are below WACC, growth can destroy value.

Final Exam

Final Exam: 5/1, 11:30 AM – 2:00 PM
(Update the date/year here if your semester calendar differs.)

Disclaimer

Educational content for jufinance.com. WACC/ROIC examples are for teaching and may change over time. Students are responsible for showing work and clearly stating assumptions (tax rate, flotation costs, compounding, and required return inputs).