Weighted average cost of capital (WACC)
WACC is what a company's money actually costs — and it's the dial that sets every DCF valuation. Here's the formula and a worked example.
What it is
WACC is the blended rate of return a company has to pay everyone who funds it — both lenders and shareholders — weighted by how much it uses of each. It answers: what does this company's money actually cost? In a valuation, it's the rate you use to discount future cash flows back to today.
The formula
Where E = equity value, D = debt, V = total (E + D), Re = cost of equity, Rd = cost of debt. Debt gets a tax adjustment because interest is tax-deductible.
Worked example
A company is 70% equity / 30% debt. Cost of equity is 9%, cost of debt 5%, tax 20%:
So 7.5% is the rate this company must clear to create value — and the rate you'd discount its cash flows at.
Why it matters
WACC is the engine room of a DCF intrinsic value. A higher WACC (a riskier business, or more expensive debt) shrinks the present value of future cash flows — so the same company is "worth" less the riskier it is. Small changes to WACC move a valuation a lot, which is why it's worth understanding rather than treating as a black box.
Put this into practice — open the screener →