Cost of Capital Calculator

What Is Cost of Capital?

Cost of capital is the minimum return a company must earn to satisfy its investors and lenders.

In simple terms:

• Investors expect a return for taking risk.
• Lenders expect interest for lending money.
• The company must earn enough to cover both.

If a project earns less than the cost of capital, it destroys value.
If it earns more, it creates value.

Why Cost of Capital Matters

Cost of capital is used in many key financial decisions, including:

• Evaluating new projects
• Valuing a company
• Setting hurdle rates
• Comparing financing options
• Deciding between debt and equity

Without this number, it is hard to judge whether a business decision makes financial sense.

What This Cost of Capital Calculator Does

This calculator estimates the Weighted Average Cost of Capital (WACC) using standard financial models.

It calculates:

• Cost of equity (using CAPM)
• After-tax cost of debt
• Capital structure weights
• Final WACC percentage

The result is a single percentage that represents the company’s overall cost of financing.

Key Inputs Explained

Each input in the calculator has a specific role. Here is what each one means in plain English.

Risk-Free Rate (%)

This is the return from an investment with almost no risk.
It is often based on long-term government bonds.

Why it matters:
It forms the base return investors expect before taking any risk.

Expected Market Return (%)

This is the average return investors expect from the overall stock market.

Why it matters:
It shows how much extra return investors want for taking market risk.

Beta

Beta measures how risky a company is compared to the market.

• Beta = 1 → Same risk as the market
• Beta > 1 → More risky than the market
• Beta < 1 → Less risky than the market

Why it matters:
Higher risk means investors demand higher returns.

Cost of Debt (%)

This is the interest rate the company pays on its borrowings.

Why it matters:
Debt is usually cheaper than equity, especially after tax benefits.

Market Value of Equity ($)

This is the total market value of the company’s shares.

Why it matters:
It determines how much weight equity has in the capital structure.

Market Value of Debt ($)

This is the total value of the company’s outstanding debt.

Why it matters:
It determines how much weight debt has in the final calculation.

Corporate Tax Rate (%)

This is the company’s effective tax rate.

Why it matters:
Interest on debt is tax-deductible, which lowers the real cost of debt.

Formulas Used by the Calculator

The calculator follows widely accepted financial formulas.

Cost of Equity (CAPM)

Cost of Equity = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)

This formula estimates the return shareholders expect based on risk.

After-Tax Cost of Debt

After-Tax Cost of Debt = Cost of Debt × (1 − Tax Rate)

This adjusts debt cost for tax savings.

Capital Structure Weights

Equity Weight = Equity Value ÷ (Equity Value + Debt Value)
Debt Weight = Debt Value ÷ (Equity Value + Debt Value)

These weights show how the company is financed.

Weighted Average Cost of Capital (WACC)

WACC = (Equity Weight × Cost of Equity) + (Debt Weight × After-Tax Cost of Debt)

This final number represents the company’s overall cost of capital.

Understanding the Calculator Results

Once you click Calculate, the tool displays four results.

Cost of Equity

This shows the percentage return shareholders expect.

A higher number means:

• Higher business risk
• More volatility
• Greater investor expectations

After-Tax Cost of Debt

This shows the real cost of borrowing after tax savings.

Debt often looks cheaper after tax, which is why many companies use it carefully.

Weighted Average Cost of Capital (WACC)

This is the most important result.

• It acts as a minimum required return
• It is often used as a discount rate
• It helps judge investment quality

Capital Structure

This shows how financing is split between equity and debt.

Example:

Equity: 71.4% | Debt: 28.6%

This helps you understand financial risk and leverage.

Practical Example

Assume a company has:

• Moderate risk
• More equity than debt
• Reasonable borrowing costs

The calculator might return:

• Cost of Equity: 11.3%
• After-Tax Cost of Debt: 4.7%
• WACC: 9.1%

This means any new project should earn more than 9.1% to be worthwhile.

Who Should Use a Cost of Capital Calculator?

This tool is useful for:

• Business owners
• Financial analysts
• Students learning finance
• Investors evaluating companies
• Startup founders planning funding

It removes guesswork and replaces it with structured analysis.

Limitations to Keep in Mind

While useful, this calculator provides estimates, not guarantees.

Important limitations:

• Assumes stable market conditions
• Relies on accurate input values
• Based on standard financial models
• Does not replace professional advice

Always use it as a decision aid, not a final answer.