Weighted Average Cost of Capital

The weighted average cost of capital, or WACC, is the blended return a company must pay all its investors. It weights the cost of equity and the after-tax cost of debt by how much of each the company uses. It is the usual discount rate for a whole business.

The formula is WACC = E/V x Ke + D/V x Kd x (1 - T). With 60% equity at 11%, 40% debt at 6% pre-tax and a 21% tax rate, that is 6.6% + 1.896%, or about 8.5%. Market values are preferred over book values for the weights.

Use WACC for free cash flow to the firm and cost of equity for cash flow to shareholders. The FAQ covers whether cost of equity is the same as WACC and whether cost of equity can be lower than WACC. The cost of equity and WACC guide works the full example.