Weighted Average Cost of Capital Formula

By Matthew Frankel, CFP – Updated Jun 8, 2025 at 10:50 PM EST

Key Points

Weighted average helps assess portfolio performance and broader market trends.
Calculating WACC involves equity and debt portions to measure capital cost.
WACC informs on a company's capital raising efficiency relative to its returns.

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The formula used to calculate weighted average cost of capital. — Image source: The Motley Fool

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Here are five steps that will make this easier:

Looking at a company's balance sheet or annual report, write down the total amount of debt and the average interest rate on the debt. If a company doesn't specify its average interest, you can find it by dividing its annual interest expense (on its income statement) by its total debt.
Look at a current stock quote for the company and write down its market capitalization.
Calculate the cost of equity using one of the methods in the next section.
Add the debt and equity portions of the capital. Divide the equity by the total to determine the equity percentage of capital and divide the debt by the total to determine the debt percentage of the capital.
Plug these values into the formula and calculate the WACC.

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Start the calculation with cost of equity

A stock's WAAC starts with an individual stock's cost of equity, which can be derived with either of two methods.

As a long-term investor, you expect the business you have bought into to generate a return. To achieve this, a company's return on invested capital (ROIC) should exceed its cost of capital. Basically, the money it can generate from an investment should be greater than the interest costs on that investment.

There are two main ways companies get capital -- by issuing new stock or by taking on debt. The cost of debt is simply the interest expense as a percentage of the total debt. On the other hand, the cost of equity can be evaluated in two different ways:

Cost of equity

If a company pays dividends, the cost of equity can be determined by the dividend capitalization model (the easier method of the two). Simply divide the company's per-share dividend by its current stock price and add the dividend growth rate. Here's the formula to calculate cost of equity using this method:

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The formula used to calculate cost of equity. — Image source: The Motley Fool

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For example, if each share of Company X trades for $50 and produces a $1 annual dividend, it has a dividend yield of 2%. And, if Company X has consistently grown its dividend in recent years by around 5%, we can add those together to find Company X's cost of equity is 7%.

On the other hand, if a company does not pay dividends, or if you simply want a method that can be applied to all stocks, the capital asset pricing model (CAPM) could be the better way to go. This is considerably more complicated and can be calculated by this formula:

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The formula used to calculate the capital asset pricing model. — Image source: The Motley Fool

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A hypothetical example of how to calculate weighted average cost of capital. — Image source: The Motley Fool

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The Foolish bottom line

While most investors won't regularly perform WACC calculations, this is still an important concept to know. Companies that can raise money at low costs of capital relative to their ROIC may have an advantage over companies that cannot. Weighted average cost of capital gives investors valuable information about a company's efficiency when it comes to raising capital to put to work for investors. Like any investment metric, it doesn't tell the whole story by itself, so it should be used as part of a more thorough investment analysis.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst specializing in the real estate and financial sectors. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, Globe St, The National Desk, and other TV networks and publications for his real estate, financial, stock market, and investing expertise.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.