Microsoft's shareholders and lenders both expect to be paid for the money they put in. Blend what each group wants, weighted by how much each provides. The answer is about 9.7% a year. That number is Microsoft's weighted average cost of capital, or WACC.
WACC is the discount rate in most company valuations. Here is what it is, how to work it out step by step and why it moves the value of a company so much.
What is WACC? The weighted average cost of capital is the average yearly return a company must earn to pay both its shareholders and its lenders, weighted by how much of each it uses.
It is the usual discount rate in a discounted cash flow (DCF). A higher WACC means a lower value today.
Shareholders cost more than lenders, because they are paid last. Interest is also tax-deductible, which makes debt cheaper still.
WACC rises with interest rates. Microsoft's moved up about 0.4 points in September 2026 alone.
The WACC formula
A company raises money in two ways. It sells shares (equity) or it borrows (debt). Each has a cost, which is the yearly return that group of investors expects.
WACC = (equity weight × cost of equity) + (debt weight × cost of debt × (1 − tax rate))
The weights are each source's slice of the total, measured at market value. So there are four inputs to find: the weights, the cost of equity, the cost of debt and the tax rate. We work through each one for Microsoft below.
Step 1: the weights
Microsoft's shares were worth $3,697bn on 24 September 2026. That is 7.43bn shares at $497.93. Its debt was $40.3bn on 30 June 2026.
So equity is 98.9% of Microsoft's capital, while debt is 1.1%. Microsoft borrows very little. That makes its WACC almost the same as its cost of equity. A company with more debt would have a WACC well below its cost of equity.
Step 2: the cost of equity
Shareholders are never promised a return, so their cost has to be estimated. A standard tool is the capital asset pricing model (CAPM). It says:
Cost of equity = risk-free rate + beta × equity risk premium
The risk-free rate is the return on a loan to the US government, which is treated as safe. We use the 10-year Treasury yield. It was 5.18% on 24 September 2026.
Beta measures how much a share moves with the market. A beta of 1 means it moves in line with the market, on average. Above 1, it swings more. Below 1, it swings less.
Source: YX Insights price data (MSFT and SPY, dividends counted)
Each dot is one month. It shows Microsoft's return against the S&P 500's in the same month. The slope of the line through the dots is the beta. Over the 60 months to August 2026, it was 1.11. So when the market rose or fell 1% in a month, Microsoft moved 1.11% on average.
Beta changes over time. From late 2016 to August 2021, Microsoft's beta was 0.79. The window you pick changes the answer.
The equity risk premium is the extra yearly return investors want for owning shares over safe government bonds. It cannot be observed directly. We use 4.14%, the estimate for 1 September 2026 published by Aswath Damodaran, a valuation professor at NYU Stern.
Put together, Microsoft's cost of equity is 5.18% + 1.11 × 4.14% = 9.78%.
Step 3: the cost of debt
The cost of debt is the yield a company would pay to borrow today. Microsoft is rated AAA by S&P and Aaa by Moody's, the highest grades. A broad index of AAA-rated US company bonds yielded 5.70% on 24 September 2026. That is only 0.52 points above the 10-year Treasury.
Interest is paid before tax is worked out, so each dollar of interest cuts the tax bill. Microsoft's tax rate was 19.4% in fiscal 2026. Its cost of debt after tax is 5.70% × (1 − 0.194) = 4.59%.
Step 4: put it together
Source: FRED (DGS10, BAMLC0A1CAAAEY); Aswath Damodaran; Microsoft Form 10-K; YX Insights price data
Weight each cost by its share of capital:
Equity: 98.9% × 9.78% = 9.67%
Debt: 1.1% × 4.59% = 0.05%
Add them up and Microsoft's WACC is 9.72%, or about 9.7% a year.
Why WACC matters so much
In a DCF, every future year of cash is divided down by the WACC. A small change in it moves the value a lot, because it compounds over every year of the forecast.
We use 9.7% in our ten-year DCF of Microsoft. The chart shows what that DCF is worth per share at other rates.
Source: Microsoft Form 10-K, fiscal 2026; YX Insights calculations
At a 9.7% WACC, our DCF gives about $260 a share. At 8%, it gives $348. At 12%, it gives $192. Microsoft's share price was $498 on 24 September 2026. To reach that price with the same cash flow forecast, the WACC would have to be about 6.4%.
The WACC also moves with interest rates. On 1 September 2026, the 10-year Treasury yield was 4.79%. At that day's yields, with every other input the same, Microsoft's WACC would have been 9.3%. Our DCF would have given $275 a share. The rise in rates alone took $15 off.
The judgement calls in WACC
The formula looks exact, but three inputs depend on choices:
Beta. Two, three or five years of data, weekly or monthly returns. Each gives a different number.
The equity risk premium. Damodaran's own estimates for 1 September 2026 run from 3.56% to 6.05%, depending on the method. A one-point change in the premium moves Microsoft's cost of equity by 1.11 points.
Leases. Microsoft also owed $88.5bn on leases on 30 June 2026. Counting them as debt lifts debt to 3.4% of capital and lowers WACC to 9.6%.
So treat WACC as an estimate with a margin around it, then test how the value changes across that margin.
WACC is the return a company must earn to pay everyone who funds it. It sets the discount rate in a DCF, so it shapes almost every valuation.
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