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.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "WACC (Cost of Capital)" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., WACC Calculator) to sanity-check assumptions.
- Read the related guide (e.g., WACC explained: how to estimate a discount rate for DCF) for context and common pitfalls.
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.
- Enterprise value vs equity value: how to bridge EV to equity: A practical guide to converting enterprise value (EV) into equity value using net debt and other claims (and avoiding common valuation mix-ups).
- DCF sensitivity: discount rate vs terminal growth (how to read it): A practical guide to DCF sensitivity analysis: why valuations swing, how to pick ranges, and how to avoid terminal value traps.