Calculate the weighted average cost of capital (WACC) — the discount rate used to value a company or project (DCF). With the CAPM formula for the cost of equity.
| Component | Value |
|---|---|
| WACC | (E/V) × Re + (D/V) × Rd × (1 − Tc) |
| CAPM (Re) | Re = Rf + β × (Rm − Rf), where (Rm−Rf) = market risk premium |
| Tax shield on debt | (1 − Tc) — interest reduces taxable profit |
WACC is used as the discount rate in DCF (discounted cash flow) valuation models — the higher the risk (higher β, higher debt load), the higher the WACC and the lower the present value of the project/company.
WACC is the discount rate used to value a company or investment project using the DCF (discounted cash flow) method. A lower WACC means a higher present value of future cash flows.
Interest paid on loans reduces a company's taxable profit (the tax shield), so the real cost of debt to the company is lower than the nominal interest rate.
For listed companies, beta is calculated from the share price's volatility relative to the market (see stock market data). For private companies, the beta of a comparable public company is used, adjusted with the Hamada formula for the debt-to-equity ratio.
It depends on the sector and risk — for stable sectors (utilities, infrastructure) WACC is often 6–9%, while for technology/growth companies it can be 10–15% or more.
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