WACC Explained, with a Free Calculator

Last updated October 29, 2026·5 min read

The weighted average cost of capital is the discount rate inside most serious valuations, and it looks more mysterious than it is. It is one average: what the company's money costs, counting both the shareholders' money and the lenders' money, weighted by how much of each the company uses. This guide builds the figure piece by piece, walks a complete calculation for Coca-Cola from its filings, and shows why a point or two in this rate moves a valuation more than most growth arguments do.

The Formula

WACC = (weight of equity × cost of equity) + (weight of debt × after-tax cost of debt)

Four inputs need honest measurement. The weights come from market values, not book values. The cost of debt is what the company pays to borrow, reduced by the tax saving on interest. The cost of equity is the return shareholders require, estimated with the capital asset pricing model. Each piece follows.

The Cost of Equity: CAPM

Cost of equity = risk-free rate + beta × equity risk premium

The risk-free rate is the return on a long government bond, the closest thing to a sure thing. The equity risk premium is the extra return investors demand for holding stocks over that sure thing. Beta scales the premium by how much the stock moves with the market: a beta of 1.0 takes the full premium, a beta of 0.5 takes half.

The Studio computes beta from five years of monthly returns against the broad market, sixty paired observations, rather than taking a published figure on faith. The risk-free rate and premium are stated settings, 4 percent and 5 percent in the worked example below, so the assumptions stay where a reader can argue with them.

The Cost of Debt, After Tax

Interest expense divided by total debt gives the pre-tax cost of debt. Interest is tax deductible, so the true cost is that rate multiplied by one minus the tax rate, where the tax rate is the company's own effective rate from its filings: income tax divided by pretax income.

The Weights

Weight of equity is market capitalization divided by market capitalization plus total debt. The debt weight is the remainder. Market values matter because the question is what the company's funding costs at today's prices, not what it cost when the shares were issued.

The Worked Example: Coca-Cola

Every figure below comes from Coca-Cola's fiscal 2025 filings or from the Studio's measurement of its stock, and the completed calculation was verified by an independent second implementation of the same definitions, which agreed on every component.

• Beta, from sixty monthly returns: 0.28. A defensive stock moves about a quarter as much as the market.
• Cost of equity: 4 percent, plus 0.28 times 5 percent, equals 5.41 percent.
• Interest expense: $1,654 million. Divided by the company's total debt, the pre-tax cost of debt is 3.65 percent.
• Effective tax rate: income tax of $2,861 million on pretax income of $15,998 million is 17.88 percent.
• After-tax cost of debt: 3.65 percent times (1 − 0.1788) equals 3.00 percent.
• Weights: the equity value is 89.84 percent of the funding total, and debt is 10.16 percent. Coca-Cola is financed overwhelmingly by its shareholders.
• WACC: (0.8984 × 5.41 percent) plus (0.1016 × 3.00 percent) equals 4.86 percent plus 0.30 percent, which is 5.17 percent.

A 5.17 percent discount rate belongs to a company with a gentle stock, cheap debt, and a modest tax bill. A growth company with a beta above 2 lands in the mid-teens by the same arithmetic, and its distant cash flows are worth far less per dollar. The rate is the company's risk, priced.

Where WACC Goes Wrong in Practice

• Book-value weights. Using the equity on the balance sheet instead of the market value can invert the weights for any company whose shares trade far from book, which is most of them.
• A borrowed beta. Published betas differ by provider, window, and index. Know which one you are holding, and remember it is a measurement of the past five years, not a property of the business.
• A tax rate from a headline. Statutory rates are not effective rates. The filings state what the company actually paid against what it earned; use that.
• A rate with no refusal in it. When a required input is missing or stale, the honest move is to stop. The Studio refuses Coca-Cola's neighbor Apple a WACC at present, because Apple's standard interest line ends at fiscal 2023 and pairing a three-year-old interest figure with current debt would mix vintages silently. A missing rate is recoverable. A quietly wrong one contaminates every value downstream.

Why a Point Matters

In a ten-year discounted cash flow, the discount rate compounds against every year and against the terminal value. For a typical growing company, moving the rate from 9 percent to 10 percent removes roughly a tenth of the value, and the terminal value guide in this series shows that arithmetic on a real print. WACC is where that rate should come from: measured from the company's own funding, not picked because it is round.

Run It Yourself

The free WACC calculator builds the rate for any ticker from its filings, showing each component the way the worked example does, so the weights, the beta, and the after-tax cost of debt can each be inspected before the average is taken. Inside Stock Valuation Studio, the same calculation supplies the discount rate for the DCF family, recomputed from the live record on every run.

Sources

• The Coca-Cola Company Form 10-K for the fiscal year ended December 31, 2025: interest expense of $1,654 million, income tax of $2,861 million, pretax income of $15,998 million. Filings are public at SEC EDGAR
• Component figures and the finished rate are from the Studio's WACC verification record, in which a second, independent implementation of the same definitions reproduced every component, including beta from sixty paired monthly returns, before the rate was accepted. The live tool recomputes from current data, so a fresh run will differ slightly.