1) What is WACC?
WACC is the firm’s blended required return on the capital it uses to fund core operating assets. It averages the cost of equity, debt, and, if any, preferred stock, weighted by their market values.
2) Why does WACC matter?
- Hurdle rate for NPV and IRR decisions.
- Discount rate for FCFF valuation.
- Performance yardstick using ROIC − WACC.
- Capital-structure trade-off between tax shields and risk.
3) Start here: game + calculator
These are the two most important interactive tools on this page. Start with the game for intuition, then use the calculator for the numbers.
🎮 WACC Interactive Game
Use the game to practice how debt, equity, taxes, and the cost of capital fit together. This is a quick way to build intuition before doing calculations.
Open the WACC Game ↗📊 WACC Calculator
Use this calculator for annual bonds, semiannual bonds, coupon rate and bond yield inputs, dividend-discount inputs, and CAPM-based cost of equity.
Open the WACC Calculator ↗5) Master formula
6) Cost of debt (Kd): bond yield, then after-tax
7) Cost of equity (Ke): CAPM or Dividend Discount Model (DDM)
| Method | Formula | When to use |
|---|---|---|
| CAPM (beta given) |
1 CAPM (Cost of Equity)
Ke = rRF + β * (Rm - rRF)
Ke = rRF + β * MRP
|
When beta and a market risk premium assumption are available. |
| DDM (dividend given) |
2 Dividend Discount Model (DDM)
Ke = D1 / (P0 - flotation_costs) + g
flotation_costs = flotation_percent * P0
|
Dividend-paying firms with stable growth assumptions. |
8) Excel pricing toolbox
CouponRate means the bond's annual coupon rate in decimal form. Example: an 8% coupon means CouponRate = 0.08.
9) In-class exercises
Exercise 1 — IBM WACC ▾
Show solution ▾
Exercise 2 — After-tax cost of debt (semiannual) ▾
Show solution ▾
Exercise 3 — Cost of equity (DDM with flotation) ▾
Show solution ▾
Exercise 4 — WACC from weights ▾
Show solution ▾
10) WACC calculator & company presets
This keeps the FIN509 calculator structure and presets.
Use the full JUFinance WACC Calculator
This is the main external calculator for bond-based cost of debt, CAPM, and dividend-discount cost of equity.
Open the WACC Calculator ↗Capital structure (market values)
Costs & tax
Presets (illustrative)
After loading, click Compute WACC. The detailed math appears below.
11) Damodaran + Interactive 4D chart
Use this to compare typical WACC, cost of equity, and leverage across industries. This is useful for sanity-checking project discount rates.
Damodaran — Cost of Capital by Sector (US)
Open the sector table to compare industry averages for beta, debt-to-equity, tax rate, cost of debt, cost of equity, and WACC.
Open Damodaran sector page ↗Interactive 4D industry chart
Rotate the chart and hover over points to compare industries.
Open the 4D chart ↗Important: Keep this graph file in the same folder as the main FIN509 HTML file if you open it locally.
12) Company type ↔ debt & WACC
| Company Type | Debt Level | WACC Level | Reasoning | Example |
|---|---|---|---|---|
| Startup | Low | High | High risk, limited cash flow → equity funding preferred. | Early-stage tech startup |
| High-Tech | Low–Moderate | High | High growth and risk, so firms avoid too much debt burden. | Biotech firm |
| Retail | Moderate–High | Moderate | Stable cash flows allow some leverage. | Supermarket chain |
| Utility | High | Low–Moderate | Predictable cash flows support heavy debt. | Electric company |
| Manufacturing | Moderate | Moderate | Balanced capital structures are common. | Auto manufacturer |
| Mature firm | High | Low | Stable and predictable cash flows usually lower WACC. | Coca-Cola |
13) GuruFocus WACC links
Use these as a starting point and verify the inputs with primary sources.
15) Notes & extras
- Assign: source beta, risk-free rate, market risk premium, YTM, and tax rate, then justify the choices.
- Compare current structure versus target D/E.
- Run ±1% sensitivity on RE and RD.