How to Calculate WACC for a Private Company: Betas and Premiums

To calculate WACC for a private company, you blend the after-tax cost of debt with the cost of equity, weighting each by its share of total firm value. The mechanics match the public-company version, but every input is harder to observe: there’s no market capitalization to look up, no stock price history to derive a beta from, and often no publicly quoted borrowing rate. You get around this by pulling data from comparable public companies, adjusting for differences in leverage and size, and using synthetic estimates where direct observations don’t exist.

The formula itself is straightforward:

WACC = (weight of equity × cost of equity) + (weight of debt × after-tax cost of debt)

Add a preferred stock term if the company has preferred shares outstanding. Everything else is about how you estimate each piece.

Inputs to Gather Before You Start

Four categories of information need to be in front of you before the math begins.

  • The current 10-year U.S. Treasury yield as the risk-free rate. In early 2026 this sits around 4.1% to 4.2%.1Federal Reserve Bank of St. Louis. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
  • A set of publicly traded peers with similar revenue streams, margins, and business models. From their filings you’ll extract levered betas and debt-to-equity ratios.2U.S. Securities and Exchange Commission. How to Read a 10-K
  • The private company’s audited balance sheet showing short-term debt, long-term debt, book equity, and interest expense. Note any preferred stock, warrants, or convertibles separately.
  • A tax rate and equity risk premium. The federal corporate rate is 21%, though effective rates vary with state taxes and deductions. Kroll currently recommends a 5.0% equity risk premium, down from 6.0% during the pandemic-era spike.3Kroll. Recommended U.S. Equity Risk Premium and Corresponding Risk-Free Rates

If assembling a peer set isn’t practical, Aswath Damodaran at NYU Stern publishes free industry-level beta datasets updated each January. His January 2026 data covers levered betas, unlevered betas, and debt-to-equity ratios across dozens of sectors, from software (levered 1.28, unlevered 1.23) to general utilities (levered 0.24, unlevered 0.15).4NYU Stern. Betas by Sector (US) Industry averages are a workable starting point when a custom peer set isn’t available.

Building the Cost of Equity from Peer Betas

Capital Asset Pricing Model logic ties expected equity return to risk: cost of equity equals the risk-free rate plus beta times the equity risk premium. A public company’s beta comes straight from stock-price data. For a private company you have to construct one, and this is where most of the disagreement in private-company valuations happens.

Unlever Each Peer’s Beta

The observed beta of a public peer reflects two things mixed together: the operating risk of the underlying business, and the financial risk added by that specific peer’s debt load. Since your private company’s leverage differs from any given peer’s, you strip out the financial piece first to isolate the operating beta, also called the asset or unlevered beta.

Use the Hamada equation. Divide each peer’s levered beta by [1 + (debt-to-equity × (1 – tax rate))]. A peer with a levered beta of 1.20, a debt-to-equity ratio of 0.50, and a 21% tax rate has an unlevered beta of roughly 0.88. Do this for every peer, then take the median. Median beats average when one or two peers carry unusually heavy debt loads that would otherwise distort the result.

Relever to the Private Company’s Capital Structure

Now go the other direction using your private company’s own debt-to-equity ratio. Multiply the unlevered peer-group beta by [1 + (target debt-to-equity × (1 – tax rate))]. An unlevered beta of 0.90, a private-company debt-to-equity ratio of 0.40, and a 21% tax rate produce a relevered beta of about 1.18. That number now reflects both the industry’s operating risk and your company’s specific financing.

Plug it into CAPM. With a 4.15% risk-free rate, a 5.0% ERP, and a 1.18 beta, the base cost of equity is about 10.05%. For most private companies this is too low, and two adjustments follow.

Adding the Size and Company-Specific Premiums

CAPM was calibrated on large, diversified public firms. Apply it unmodified to a $15 million-revenue private company and you’ll understate the cost of equity, which overstates value. The size and company-specific adjustments are what make the biggest practical difference in a private-company WACC.

Size Premium

Long-run market data shows smaller companies earn higher returns than their betas predict. Kroll’s Cost of Capital Navigator publishes size premia by market-cap decile. The smallest public companies carry premia of 3% to 6% or more above what CAPM produces on its own. Since most private companies are smaller than even the bottom public decile, analysts routinely add a size premium. The specific figure depends on where the company’s revenue, earnings, and assets fall within Kroll’s size groupings.

Company-Specific Risk Premium

After the size adjustment, individual risks may justify an additional premium. Kroll cites concentrated customers, dependence on a key person, pending litigation with material cash-flow exposure, or firm-specific regulatory risk as common drivers.5Kroll. The Use of Company-Specific Risk Premium in Valuations Court decisions have accepted company-specific premiums ranging from under 2% to over 3%, but the analyst has to articulate which specific risks justify the number. Adding one without documented support tends to get challenged quickly in litigation or diligence.

Continuing the example: a base CAPM cost of equity of 10.05%, a 3.5% size premium, and a 1.5% company-specific premium yields a cost of equity of 15.05%. That five-point gap versus the unadjusted CAPM number changes the valuation of the business meaningfully.

The Build-Up Method When Peers Don’t Exist

If the private company operates in a niche without traded peers, or the closest peers are in foreign markets with different risk profiles, modified CAPM breaks down because there’s no defensible beta. The build-up method skips beta and stacks risk components directly:

Build-up estimates tend to run higher than CAPM for the same company, partly because CAPM’s beta can mask risks that theoretically don’t matter to a diversified investor. Owners of private companies are typically undiversified, with most of their net worth concentrated in the business, so the build-up result often better reflects what a real investor would demand.

After-Tax Cost of Debt

Debt is easier to estimate than equity, but private companies still create complications. There’s no rated bond with an observable yield, just a mix of bank loans and revolvers.

Start with What the Company Actually Pays

Divide total annual interest expense by total outstanding debt from the balance sheet. That produces a weighted average coupon across all borrowings. If the company recently refinanced or added new facilities, weight recent rates more heavily, since fixed-rate loans originated years ago may not represent today’s borrowing cost.

Synthetic Credit Ratings When the Rate Isn’t Representative

When the observed rate is stale or missing, assign a synthetic credit rating based on financial ratios. Damodaran’s January 2026 data maps interest coverage (operating income divided by interest expense) to implied ratings and default spreads for large non-financial firms:

  • Coverage above 8.5: Aa2/AA rating, 0.55% spread.
  • Coverage 3.0 to 4.25: A3/A- rating, 0.89% spread.
  • Coverage 2.0 to 2.25: Ba2/BB rating, 1.84% spread.
  • Coverage 1.25 to 1.5: B3/B- rating, 5.09% spread.
  • Coverage below 0.2: D rating, 19.00% spread.
6NYU Stern. Ratings and Coverage Ratios

Add the spread to the current 10-year Treasury yield. A company with a coverage ratio of 3.5 in early 2026 gets an A- synthetic rating, producing a pre-tax cost of debt of roughly 5.0% (4.15% + 0.89%).1Federal Reserve Bank of St. Louis. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity

Apply the Tax Shield

Interest is deductible from taxable income, which lowers the effective borrowing cost.7Office of the Law Revision Counsel. 26 USC 163 – Interest Multiply the pre-tax cost of debt by (1 – tax rate). At a 21% rate and 5.0% pre-tax cost, the after-tax figure is about 3.95%. That tax deduction is why debt sits below equity in every WACC calculation.

When Section 163(j) Caps the Deduction

Don’t assume the full interest deduction always applies. Section 163(j) of the Internal Revenue Code limits the business interest a company can deduct in a given year, generally to 30% of adjusted taxable income plus business interest income and floor plan financing interest.8Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Since 2022, ATI is calculated on an EBIT basis rather than EBITDA, so depreciation and amortization are no longer added back and the cap bites harder.

For highly leveraged private companies, some interest expense may be non-deductible in the current year (though disallowed amounts carry forward). When that’s the case, the effective tax shield shrinks and the after-tax cost of debt should be adjusted upward. Companies with average annual gross receipts of $32 million or less over the prior three years are generally exempt, so many smaller private companies don’t need to worry about the cap.

Setting the Capital Structure Weights

WACC weights each financing source by its share of total firm value. Public companies use market values on both sides. Private companies don’t have that option, so there are three practical approaches.

Book Value

Pull total debt and total equity from the audited balance sheet. Divide each by their sum. A company with $4 million of debt and $6 million of book equity gets a 40/60 debt/equity split. The weakness: book equity can diverge significantly from the true value of the business, especially for mature companies with low asset bases and strong earnings.

Target Capital Structure

If the company is planning to shift its leverage, either by paying down debt or raising new financing for expansion, today’s balance sheet is a snapshot that won’t reflect the ongoing mix. In that case, use a target structure based on the median debt-to-equity ratio of the peer group or management’s stated financing plan. Most valuation professionals prefer this because WACC feeds a multi-year DCF, and the weights should reflect the capital structure the company will carry across that horizon.

Adjusting Debt to Market Value

When rates have moved significantly since debt was issued, the book and market values of that debt diverge. A fixed-rate loan originated at 3.5% is worth less to the lender in a 5.0% rate environment. To adjust, discount the remaining principal and interest payments at the company’s current borrowing rate. This matters most for large, long-duration fixed-rate obligations. For short-term revolvers or floating-rate debt, book value is close enough.

Preferred Stock and Convertible Instruments

Private companies with institutional investors often carry preferred stock or convertible notes. These don’t fit the two-component formula, and ignoring them produces a misleading WACC.

Preferred Stock

Preferred behaves as a hybrid: fixed dividend like debt, but sitting in equity on the balance sheet. Cost of preferred is the annual preferred dividend divided by the current value of the preferred shares. Preferred dividends aren’t tax-deductible, so no (1 – tax rate) adjustment applies. When preferred is present, the formula expands to three terms: (weight of common equity × cost of equity) + (weight of debt × after-tax cost of debt) + (weight of preferred × cost of preferred).

Convertible Debt

Convertible notes are common in venture-backed and growth-stage companies. Since the holder can convert to equity under certain conditions, the instrument is part debt and part equity. Split it: discount the stated interest and principal at the company’s straight-debt borrowing rate to get the debt component, and treat the residual as equity. The debt piece goes into total debt for weighting; the equity piece goes into equity. Treating the whole convertible as debt underweights equity and produces a WACC that’s too low.

Putting It Together: A Worked Example

A private manufacturing company has $8 million of debt and estimated equity value of $12 million, so total firm value is $20 million. Debt weight is 40%, equity weight 60%. The analyst estimates a pre-tax cost of debt of 5.5% and a cost of equity of 15.0%, built from a 4.15% risk-free rate, a 5.0% ERP, a relevered beta of 1.10, a 3.5% size premium, and a 1.85% company-specific premium. At a 21% tax rate:

  • After-tax cost of debt: 5.5% × (1 – 0.21) = 4.35%.
  • Weighted debt component: 40% × 4.35% = 1.74%.
  • Weighted equity component: 60% × 15.0% = 9.00%.
  • WACC: 1.74% + 9.00% = 10.74%.

That 10.74% becomes the discount rate applied to projected free cash flows in a DCF. Two analysts running the same exercise will often land on different WACCs, and the disagreements usually live in the cost of equity, specifically in the size and company-specific premiums. Documenting the rationale for each input matters as much as the arithmetic, because reviewers challenge assumptions before they challenge the math.