Valuation
WACC
Also called Weighted average cost of capital
The blended cost of a company’s debt and equity funding, weighted by how much of each it uses.
How it works
WACC is the return a company must earn to satisfy everyone who funded it. It is the standard discount rate for valuing the whole business.
Debt is cheaper than equity because lenders take less risk and interest is usually tax-deductible, which is why adding some debt can lower WACC — up to the point where the added risk raises both costs.
Formula
WACC = (E÷V × cost of equity) + (D÷V × cost of debt × (1 − tax rate))Related terms
- Discount rateThe rate used to convert future money into what it is worth today.
- Cost of equityThe return shareholders require for the risk of owning a company’s shares.
- Capital structureThe ranking of everyone who funded a company, deciding who gets paid first if it fails.
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
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