WACC (Weighted Average Cost of Capital)

What is WACC (Weighted Average Cost of Capital)? — Definition

WACC (Weighted Average Cost of Capital) blends a company's cost of equity and cost of debt, weighted by their relative proportion in the capital structure. WACC = (E/V × Re) + (D/V × Rd × (1 - T)), where E is equity, D is debt, V is total capital, Re is cost of equity, Rd is cost of debt, and T is the tax rate.

WACC is critical in DCF analysis because it's used as the discount rate — the higher the WACC, the lower the present value of future cash flows, and thus the lower the intrinsic value. A company with a WACC of 8% will appear more valuable than an identical company with a 12% WACC, because the discount is smaller.

Example

A stable consumer staples company might have a WACC of 7–8% (low risk, steady cash flows, some cheap debt). An early-stage biotech with no revenue and binary outcomes might have a WACC of 15–20% (very high risk). Applying a 7% WACC to the biotech's projected revenues would dramatically overvalue it.

WACC is explicitly disclosed in every BMInsider 100X Insider Report valuation model, along with an explanation of how each component was derived, so subscribers can form their own view on the appropriate discount rate.