Investment BankingAdvanced

WACC

Weighted Average Cost of Capital

The blended return a company must pay to its lenders and shareholders.

Detailed explanation

It weights the after-tax cost of debt and the cost of equity by their share of total capital. It is the discount rate in a DCF.

Formula

WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1 − Tax rate)

Example

70% equity at 14%, 30% debt at 9% with 25% tax → 0.7×14 + 0.3×9×0.75 = 11.8%.

Why it matters

A project earning less than WACC destroys value.

Key points

  • Cost of equity often from CAPM.
  • Debt is cheaper due to tax shield.
  • Small changes move DCF value a lot.

Related terms

Discounted Cash FlowCAPMROCE

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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.