A WACC is the minimum a business has to earn
A company funds itself from shareholders and lenders. Shareholders expect a return for taking the risk; lenders charge interest. Weighted by how much of each is used, those two requirements give the WACC — and a business earning less than it is destroying value for the people who funded it.
That makes it the hurdle for an investment decision: a project returning less than the WACC does not cover the cost of the money behind it. It is also why a DCF discounts at the WACC — doing so builds the hurdle into the valuation.
The tax shield is what makes debt cheap
Interest is deductible. Money borrowed at 8% costs a company taxed at 25% an effective 6%: paying 8 of interest reduces taxable income by 8 and the tax bill by 2. That is why this tool shows the pre-tax and after-tax rates as separate lines.
Dividends get no such treatment — they are paid out of after-tax profit and reduce no tax. At the same required return, debt is therefore cheaper than equity, and adding debt lowers the WACC.
Not indefinitely, though. More debt raises the chance of default, so lenders charge more and shareholders demand more. This tool takes beta and the borrowing rate as inputs and does not model that response, so when you raise the debt weight, raise those two as well or the answer is not a real one.
Every CAPM input is an estimate
The cost of equity is the risk-free rate plus beta times the equity risk premium. None of the three comes off a filing. The risk-free rate depends on which maturity you take, beta on the window and index used to measure it, and published estimates of the premium range from about 4% to 7%.
A WACC is therefore a range, not a figure to a decimal place. Run it at a 5% premium and at 6% and the spread is immediately visible. If that spread is wide enough to reverse a decision, the useful question is whether the conclusion survives across it, not which single number is right.
Use market capitalisation for the equity side, not book equity. A WACC is the return the market requires now, so the weights have to be the market's. Book values overstate the debt weight for any company trading above book.