The Weighted Average Cost of Capital or WACC is a discount rate used to find the present value a company’s future cash flows that is applied in various Discounted Cash Flow (DCF) analyses.
Broadly speaking, a company’s assets are financed by either debt or equity. The WACC is the average of these sources of financing, each of which is weighted by its respective use.
WACC can also be described as the weighted average rate of return a firm theoretically pays to its debt and equity providers to compensate for the risk they undertake by investing their capital.
We estimate WACC using the Capital Asset Pricing Model (CAPM).
How to calculate the WACC:
Total Capital = Debt + Equity
WACC =
(Equity / Total Capital) * Cost of Equity
+ (Debt / Total Capital) * Cost of Debt * (1 - Tax Rate)