WACC
Also called: weighted average cost of capital
The average return required by all of a company's providers of capital, weighting the cost of equity and the after-tax cost of debt.
WACC = (E ÷ V) × cost of equity + (D ÷ V) × cost of debt × (1 − tax rate). It is the discount rate for free cash flow to the firm and the hurdle a business's returns on capital must beat. More debt does not keep lowering it, because lenders and shareholders demand more as risk rises.
Example
Equity of 70% costing 14% and debt of 30% at 9% interest with a 25% tax rate give a WACC of about 11.8%.
Learn more in these lessons
- Weighted average cost of capital (WACC)What is WACC, and when should you use it to value a company?
- Discounted cash flow valuationHow do you build a discounted cash flow valuation?
Related terms
Spotted a mistake or something unclear? Report it by email. Here is how corrections work.