What is Weighted Average Cost of Capital?

Every dollar in your business has a cost. Debt isn’t free; equity isn’t either. If you don’t know what your capital costs, you can’t tell if your investments are actually worth it.

Weighted Average Cost of Capital (WACC) answers that. It distills your blend of equity and debt into one number: the minimum return a project has to beat to be worth doing. It gives you a hurdle rate that investors, boards, and operators can agree on. If IRR is your speedometer, WACC is your speed limit.

This guide walks through how to calculate WACC, when it matters, and how to set it up in Runway so it updates automatically.

Understanding Weighted Average Cost of Capital

WACC is the average rate your company pays to raise capital, weighted by how much of each type you use: equity and debt. It’s what you give up, in ownership or obligations, to fund growth. And it becomes the bar for every decision that follows.

WACC sets the bar for every investment. If a project can't beat your WACC, it's not adding value. If it does, you're creating value for everyone who owns a piece of the company.

Startups use WACC to value the business, decide what ideas to pursue, and show investors they're focused on returns. The core of WACC is simple: it weighs your cost of equity and cost of debt based on how much you use of each.

The Weighted Average Cost of Capital formula (and why it matters)

The formula looks tough, but it's just a weighted average. You adjust for debt's tax benefits.

The standard WACC calculation

Use this formula:

WACC = (E / (D + E)) × Re + (D / (D + E)) × Rd × (1 - T)

  • E = Market value of equity
  • D = Market value of debt
  • Re = Cost of equity
  • Rd = Cost of debt (pre-tax)
  • T = Marginal tax rate

For example, if your bond pays 5% and your tax rate is 30%, your after-tax cost of debt is 3.5% (5% × (1 - 30%)). Interest expenses lower your tax bill.

Variants of the formula

Complex capital structures require specific math tweaks. Startups often use these variations to get the numbers right.

  • Capital asset pricing model (CAPM) for cost of equity: Most finance teams use CAPM to pinpoint cost of equity. It calculates returns based on risk.

Re = Risk-free rate + (Beta × Market risk premium)

Source the risk-free rate directly from 10-year treasuries. Beta describes your volatility relative to the market, while the premium accounts for the return investors demand beyond safe assets.

  • Dividend discount model: Mature companies with steady payouts normally prefer this method. It uses expected dividends and growth rates to calculate cost of equity for established businesses.
  • Preferred stock adjustments: Handle preferred shares as a separate component if you issue them. Assign a unique cost and weight alongside your debt and standard equity.
  • Multiple debt instruments: Companies with multiple loans or bonds need a weighted average cost of debt. Calculate the cost for each instrument based on its share of total debt obligations to get a precise figure.

Getting the inputs right

Cost of Equity (Re)

Use the Capital Asset Pricing Model (CAPM):

Re = Risk-free rate + (Beta × Market risk premium)

  • Risk-free rate: use 10-year treasuries.
  • Beta: how volatile you are compared to the market. Use public comps.
  • Market risk premium: typically 5-7%.

Startups adjust beta for size, stage, and structure. It’s a guess, so run sensitivities.

Cost of Debt (Rd)

Use the actual interest rates you pay. Multiply by (1 - T) only if you have taxable income.

Early-stage? Skip the tax shield unless you’re profitable now.

Capital Structure (D & E)

Use market value. If you’re private, approximate:

  • Equity = last post-money valuation
  • Debt = current principal value of outstanding loans or notes

Include convertibles and preferreds if they act like debt. SAFEs usually stay out until they convert.

WACC and strategic financial decisions

WACC connects to almost every important call you make in finance. Many teams use it as the hurdle rate. Every project must beat this number to win funding, and sometimes you might add a buffer to account for execution risk. When you calculate the Internal Rate of Return (IRR) for projects, you approve only if the IRR clears your WACC. That represents real value added.

You also use WACC as the discount rate for Net Present Value (NPV). A positive NPV means expected returns beat your cost of capital. As explained in what-if scenario planning, you should test how sensitive your decision is to different rates. From a capital budgeting perspective, ranking projects by their spread over WACC lets you fund the best initiatives first.

This metric drives venture and acquisition valuations significantly. You use WACC as the discount rate for cash flows. Project your free cash flows, then discount at WACC to determine company value.

Finally, WACC informs how you structure debt and equity. More debt can lower WACC thanks to tax benefits, but too much increases risk and hikes up your cost of equity. You need to find the right balance. Knowing your WACC helps you choose between debt or new equity during fundraising. If debt is cheap, you might prefer loans to avoid diluting ownership.

Benchmarking and common rules of thumb

WACC changes by industry, company age, and risk. Startups usually face higher WACC because investors want higher returns to offset risk.

Companies with uncertain revenue, new models, or slow paths to profit have higher WACC. Investors price in risk, so your cost of equity goes up. As you grow and risk drops, WACC falls.

  • Software and SaaS: WACC often falls between 15% and 25% at scale.
  • Hardware startups: Expect higher WACC due to capital needs and long development.
  • Biotech: WACC can hit above 30% because of regulatory risk.

The technology industry saw cost of capital rise as rates climbed after 2022. When interest rates were low, WACC shrank. Higher rates now mean more expensive capital.

Use benchmarks as a starting point. Your WACC depends on your business, growth, profits, and markets.

WACC and startup finance

WACC serves as more than a theoretical benchmark. It represents the true cost of fueling your runway through equity and debt.

  • Drive valuation discussions with data. When VCs present an offer, use WACC to reverse-engineer their return expectations and understand the impact on your cap table. You enter negotiations knowing the real price of that capital.
  • Make more informed capital allocation decisions. Startup funds are expensive. Compare potential projects against your hurdle rate to ensure you strictly spend cash on growth engines that justify the high cost of venture backing.
  • Build confidence in the boardroom. Showing that your roadmap generates returns exceeding your cost of capital proves financial discipline. As we mention in our guide on financial reports investors expect, grounded metrics establish credibility with sophisticated stakeholders.
  • Track your de-risking journey. Hitting product-market fit and revenue milestones lowers your risk profile. A declining WACC preserves founder ownership by unlocking cheaper financing alternatives like venture debt in later stages.

Common pitfalls to avoid

Here are mistakes finance teams can sidestep:

  • Using only cost of equity or cost of debt: WACC is a mix. Considering just one number leads to the wrong calls. A project may look good against your cost of debt but not when factoring in equity.
  • Relying on book values: Book values are old news. Always use current market values for weighting debt and equity.
  • Missing the tax benefit on debt: Interest is tax-deductible. Not adjusting overstates WACC and can make you skip projects that add value.
  • Leaving out preferred or convertible instruments: These forms of capital add complexity. Ignore them and your WACC number goes off, especially for venture-backed teams.
  • Using the wrong beta: Pick comparables carefully. Adjust for different capital structures. Accurate beta = accurate cost of equity.
  • Letting WACC get stale: Recalculate as you grow or raise new funding. Out-of-date WACC leads to bad decisions.
  • Applying the same WACC to every project: Different risks matter. Use a risk-adjusted rate for projects that are riskier.
  • Guessing cost of equity for private startups: Lack of a stock price means you estimate. Be up front about uncertainty. Run sensitivity tests to see the impact of different assumptions.
  • Ignoring the circular nature of WACC calculations: Using WACC to value equity, which feeds back into WACC, can create a loop. Solve this by updating iteratively or using specialized tools.

Modeling WACC in Runway

Building WACC in spreadsheets gets complicated fast. Inputs change, scenarios pile up, and it's easy to lose the thread. Runway makes it easier.

Set up WACC tracking in Runway in just a few steps:

  • Create a capital structure page. Use the sidebar to add a new Page called "Capital Structure & WACC" to keep your numbers organized. Learn the basics of pages.
  • Add capital structure drivers. Insert a drivers table block to host your assumptions. Create numeric drivers for Total Market Value of Equity (E), Total Market Value of Debt (D), Cost of Equity (Re), Cost of Debt (Rd), and Marginal Tax Rate (T). You can set these as constants or time-varying series.
  • Calculate capital weights. Create derived drivers for Total Capital, Equity Weight, and Debt Weight. Use the formula column or click the ƒ button to set your logic using Runway's functions.

Total Capital = Equity + Debt

Equity Weight = Equity / Total Capital

Debt Weight = Debt / Total Capital

Tip: Wrap denominators in an ifError() function to avoid dividing by zero if capital is unset.

  • Build the WACC formula. Create a driver named WACC and input the standard formula: Equity Weight * Cost of Equity + Debt Weight * Cost of Debt * (1 - Marginal Tax Rate). Formula inheritance handles the math automatically. Read more on formulas basics.

Runway supports separate logic for history and projections. Use actuals formulas to reference integration data (like GL debt balances) up to the current date, then switch to forecast formulas for future periods.

Once the basics are in place, spin up a new Scenario to test assumptions without breaking your baseline. Try a "High Rate Environment" by overriding your Cost of Debt driver. All downstream WACC calculations update instantly.

If capital structure varies by region or entity, move these formulas into a Database. Use segments to calculate WACC for specific business units. Learn how to segment drivers.

Make sure to document assumptions. Use text blocks on your page to explain your methodology so stakeholders trust the numbers during audits. Your new WACC driver is ready to use. Reference it directly in valuation models or discount rate calculations across your workspace. You can also drill into the driver to see exactly how it's calculated.

Frequently Asked Questions

How often should a startup update its WACC, and what triggers a recalculation?

Revisit WACC any time your risk profile or capital structure shifts. This typically follows a funding round, major debt issuance, material revenue predictability change, or a significant macro rate shift.

Early-stage teams often need a quarterly refresh since valuation signals change quickly. Later-stage companies can update semiannually unless markets move sharply.

Can WACC differ across product lines or business units?

Yes. If different units have unique risk levels, customer profiles, or financing structures, each justifies its own hurdle rate. A hardware division with long payback periods demands a higher WACC than a software unit with recurring revenue.

Segment-level WACC improves capital allocation. It usually stops low-risk projects from subsidizing high-risk bets.

What’s the best way for private startups to estimate inputs like beta or market value of equity when there’s no public market signal?

Private teams usually triangulate from comparable public companies, adjust betas for leverage differences, and use valuation marks from the latest fundraising round. It's helpful to run sensitivity tests around those inputs.

Since private valuations are episodic, build a range rather than rely on a single point estimate for discount-rate decisions.

Is it possible to automate WACC so it updates when assumptions or external data change?

Yes. Modern FP&A platforms like Runway can pull in debt balances, tax assumptions, or scenario inputs automatically. Some teams even connect treasury data, scenario overrides, and capital structure drivers so WACC updates dynamically.

Use WACC in your financial planning

Understand your weighted average cost of capital to make stronger decisions. WACC grounds your evaluation, aligns the team, and helps you put every dollar to work.

Calculating WACC is the start. In Runway, you can automate WACC tracking, test scenarios, and share insights with your board, all in one place.

Track WACC live in Runway.