Weighted Average Cost of Capital (WACC)
The blended cost of equity and debt — the hurdle rate for investments.
WACC is the required return a company must earn to satisfy all capital providers (equity and debt holders). It's the weighted average of cost of equity (via CAPM: Rf + β×MRP) and after-tax cost of debt, weighted by market values. Example: If cost of equity is 12%, cost of debt is 5%, tax rate is 25%, and the company is 60% equity / 40% debt, WACC = 0.6×12% + 0.4×5%×(1−0.25) = 8.7%. Use in DCF: WACC is the discount rate for free cash flows — it represents the opportunity cost of capital. Typical values: Stable companies 6-10%, Growth/tech 10-14%, High-risk/EM 14-20%. Sensitivity warning: A 1% change in WACC can swing DCF value by 20-30%—run sensitivity tables!
Formula