WACC
Factual definition
Weighted average cost of capital: the costs of financing weighted by their market-value shares, with debt adjusted for tax benefits where applicable. WACC discounts appropriate free cash flow to the firm; cash flows to equity use the cost of equity instead.
Also called Weighted average cost of capital
WACC in round numbers
Hypothetical market-value financing mix: 40% debt at a 4% cost already stated after tax, plus 60% equity at a 14% cost. WACC = 40% × 4% + 60% × 14% = 1.6% + 8.4% = 10.0%. The weights total 100%; do not apply a second tax adjustment to the 4% input.
| first | 40% debt × 4% after-tax cost = 1.6% |
|---|---|
| + | 60% equity × 14% cost = 8.4% |
| = | WACC 10.0% |
How Shayne Fitz-Coy uses WACC
Often in class you derive a WACC, but in practice a managing director hands you the number and tells you to use it.
The firm has a house rate and your job is to apply it consistently. You will still be asked to derive one in an interview.
Terms Related to WACC
DCF · CAPM & beta · Discount rate · Leverage · APV · Unlevered beta · All of the glossary