WACC (weighted average cost of capital)
WACC is the average cost of financing a company, weighing what it pays on its debt and what its shareholders demand according to the share of each. In a DCF valuation it is the rate at which future cash flows are discounted: the higher the WACC, the lower the present value of the business. A one-point change in WACC can move a valuation by more than 15%.
How it is calculated
WACC = (E ÷ (D+E)) × cost of equity + (D ÷ (D+E)) × cost of debt × (1 − tax rate). A company with €700M of equity and €300M of debt, a 10 % cost of equity, debt at 5 % and a 25 % tax rate: 0.70 × 10 % + 0.30 × 5 % × 0.75 = 7.0 % + 1.125 % = 8.125 %. The cost of equity normally comes from CAPM: risk-free rate + beta × market risk premium. Debt enters after tax because interest is deductible, which is why a leveraged company has, on paper, a lower WACC —until bankruptcy risk makes both legs more expensive at once.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is NOT
It is not the rate at which the company borrows from its bank: that is only the cost of debt, one of the two legs, and almost always the cheap one. It is not an observable figure either —the cost of equity is estimated, and beta and the risk premium are choices made by whoever is valuing, not published numbers. And it is not a constant: it changes with the risk-free rate, with the capital structure and with the country. A WACC copied from another company in the sector is an assumption dressed up as data.
Formula
WACC = (E÷V)·Re + (D÷V)·Rd·(1 − t) Explained in depth
Where it is used
See it on real data
Celsmar computes this from the accounts companies file with their regulator, and shows which line every figure comes from. Free to start, no card.
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.