WACC and CAPM calculator

Work out the cost of equity from the capital asset pricing model, the after-tax cost of debt, and the weighted average cost of capital a firm's projects must beat.

How it works

Cost of equity = r_f + β × (equity risk premium)

WACC = (E ÷ V) × r_e + (D ÷ V) × r_d × (1 − t)

E and D are market values and V = E + D. The tax shield on interest is why debt enters after tax.

A worked example

A risk-free rate of 3%, beta 1.2 and an equity risk premium of 5% give a cost of equity of 3 + 1.2 × 5 = 9.0%. Debt costing 5% before a 25% tax rate costs 3.75% after tax. With equity of 600 and debt of 400 the weights are 60% and 40%, so the WACC is 0.6 × 9 + 0.4 × 3.75 = 6.90%.

Common mistakes on the exam

Use market values for the weights, not book values.
Only the cost of debt is tax-adjusted. The cost of equity is not.
The equity risk premium is the market's expected return over the risk-free rate, not the market return itself.

The exam allows only certain calculator models, and the rules change: check CFA Institute's current calculator policy before you rely on any keystroke here.

Where this is taught

Contrast market value with book value and link return on equity to the cost of equity CFA Level I · Equity Investments
Estimate the return equity holders require with both the market model and the CAPM CFA Level I · Equity Investments
Work out a required return with the capital asset pricing model CFA Level I · Portfolio Management
Work out a firm's weighted average cost of capital CFA Level I · Corporate Issuers

Read the guide

CAPM and the security market line: required return explained

Practise what you read

Today's practice question One question, with every wrong option explained.
Free Level I diagnostic test Twelve questions that show which topics to start with.
Free finance calculators Check your arithmetic on the exam's core formulas.

Questions people ask

What does WACC measure?

The average return a firm must earn on its assets to satisfy its lenders and its shareholders, weighted by how much each has put in. Projects earning less than it destroy value.

Why is debt cheaper than equity in WACC?

Lenders are paid first and take less risk, so they ask for a lower return, and the interest is tax-deductible. Both effects lower the after-tax cost of debt.

Is the risk-free rate the same as the market return?

No. The risk-free rate is the return on a default-free asset; the equity risk premium is the extra the market is expected to earn over it.

Practise this until the arithmetic is automatic: questions on every topic, with the reason each wrong option is wrong.

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