Weight each source of capital
Weighted average cost of capital is the blended required return on a firm’s equity and interest-bearing debt. Weights are the market values you enter divided by their sum. The standard identity multiplies debt cost by 1 − the applicable marginal tax rate, but that input should reflect a tax shield the firm can actually use; enter 0% when no deduction applies. NPV discounts project cash flows at a hurdle rate, and CAPM is one way to estimate the cost of equity.
WACC = (E/V) × cost of equity + (D/V) × cost of debt × (1 − applicable tax rate)
Example
$600,000 of equity at 12% and $400,000 of debt at 6%, with a 21% applicable tax rate, has a 60% equity weight. After-tax cost of debt is 4.74%. WACC is 0.60 × 12% + 0.40 × 4.74% = 9.096%. At a 25% rate the same mix is 9%.
What this blend leaves out
Equity and debt must be non-negative and not both zero. Preferred stock, leases, interest-deduction limits, losses, target weights, flotation costs, and country risk stay outside this two-source identity. Enter market values when available. Use a capital structure and risk level that match the cash flows being discounted.