Definition
WACC is a blended required return for capital providers (equity and debt). It is commonly used as a discount rate proxy in DCF models.
Formula
WACC = (E/V)*Re + (D/V)*Rd*(1 - tax rate)
Example
If E/V = 70%, D/V = 30%, Re = 15%, Rd = 7%, and tax rate = 25%, WACC ~ 0.7*0.15 + 0.3*0.07*(1-0.25) = 12.1%.
How to use it
- Higher WACC lowers present value; lower WACC raises it.
- WACC depends on capital structure, market risk, and interest rates.
Measured as
WACC = (E/V)*Re + (D/V)*Rd*(1 - tax rate)
Operator takeaway
- Higher WACC lowers present value; lower WACC raises it.
- WACC depends on capital structure, market risk, and interest rates.
- Tie WACC (Cost of Capital) to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with WACC Calculator if you need to turn the definition into an operating assumption.
- Read WACC explained: how to estimate a discount rate for DCF if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- DCF Sensitivity Calculator: Estimate how enterprise value changes with discount rate and terminal growth assumptions (simple 3x3 sensitivity).
Guides
- WACC explained: how to estimate a discount rate for DCF: A practical guide to WACC: what it is, how to compute it, and how to use it (carefully) as a DCF discount rate.
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.
- Discount rate: how to choose it for NPV and DCF: A practical guide to discount rates: what they mean, how to choose a rate (WACC vs MARR), and how to avoid common mistakes.
- Equity value: how to bridge from enterprise value without mixing terms: Use this guide when your DCF or multiples output is EV but the decision you care about is what belongs to shareholders. It shows the EV-to-equity bridge, which balance-sheet items matter, and where analysts commonly double-count or mismatch dates.
- DCF sensitivity analysis: how WACC and terminal growth move valuation: Use this guide when a single DCF output looks too precise. It shows how to build a WACC vs terminal growth grid, choose defensible ranges, and judge whether a valuation is robust enough to use in a decision.