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Worked example
WACC, worked through a food manufacturer
A business is funded by a mix of equity and debt, each with its own cost. WACC blends them into one number, the rate a project has to beat. Here it is worked step by step through a food manufacturer.
Updated September 2026 · 7 min read
Most businesses are funded by two things: money from shareholders (equity) and money borrowed (debt). Each has a cost, and they are rarely the same. The weighted average cost of capital, or WACC, blends the two into a single percentage: the overall cost of the company's money, and the minimum return a new investment has to clear to be worth doing. Let us work it through.
What WACC is for
WACC matters because it is the hurdle rate. When a company appraises an investment, it discounts the future cash flows at its WACC; if the net present value is still positive, the project earns more than the money costs and adds value. So getting WACC right is the foundation of sound investment decisions.
The scenario
Larkspur Foods is financed by both equity and debt. Its cost of equity is 12%. It has borrowings with a pre-tax cost of 6.25%, and the company pays tax at 20%. By market value, its equity is worth £6m and its debt £4m. What is its WACC?
Step 1: the after-tax cost of debt
Debt has a hidden discount: interest is tax-deductible, so every pound of interest saves the company tax. We therefore use the after-tax cost of debt. At a 20% tax rate:
6.25% × (1 − 0.20) = 5.0%.
The cost of equity is not adjusted for tax, because dividends are not tax-deductible. So we use 12% for equity and 5.0% for debt.
Step 2: the weights
We weight each source by its market value, not its book value. Total finance is £6m + £4m = £10m, so equity is 60% and debt is 40% of the capital.
Step 3: blend them
Multiply each cost by its weight and add: (60% × 12%) + (40% × 5.0%) = 7.2% + 2.0% = 9.2%. That is Larkspur's WACC.
Larkspur should discount its investment appraisals at 9.2%. A project that returns more than 9.2% adds value; one that returns less destroys it. Two things to watch in the exam: always use the
after-tax cost of debt, and weight by
market value, not the figures in the accounts.
Where this comes up in ACCA
WACC is a core calculation in Financial Management (FM), both on its own and as the discount rate feeding an investment appraisal. It returns, with more complex capital structures, in Advanced Financial Management (AFM). The blend above is the foundation for all of it.
The best way to lock it in is to work it, not read it. The free ACCA FM course on Clevernest teaches the cost of capital inside a real business, with hands-on exercises as you go.
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Frequently asked questions
What is WACC?
WACC, the weighted average cost of capital, is the blended cost of a company's finance: its cost of equity and its after-tax cost of debt, each weighted by its share of the total capital. It is the minimum return a new investment must earn, and the rate used to discount cash flows in investment appraisal.
How do you calculate WACC?
Weight each source of finance by its market value, multiply by its cost, and add them up. In our example (60% x 12%) + (40% x 5.0%) = 7.2% + 2.0% = 9.2%, using the after-tax cost of debt.
Why do you use the after-tax cost of debt?
Because interest is tax-deductible, so borrowing costs the company less than the headline rate. At a 20% tax rate a 6.25% pre-tax cost of debt becomes 6.25% x (1 - 0.20) = 5.0% after tax. Equity is not adjusted, because dividends are not tax-deductible.
Do you weight WACC by book value or market value?
Market value. The market values of equity and debt reflect what the finance is actually worth today, so they give a truer weighting than the historic book figures in the accounts.
Where is WACC tested in ACCA?
It is a core topic in Financial Management (FM), on its own and as the discount rate for investment appraisal, and it returns with more complex structures in Advanced Financial Management (AFM).