Weighted Average Cost of Capital (WACC) Definition

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

WACC, or Weighted Average Cost of Capital, is a financial metric used to measure the cost of capital to a firm. It is most usually used to provide a discount rate for a financed project, because the cost of financing the capital is a fairly logical price tag to put on the investment. WACC is used to determine the discount rate used in a DCF valuation model.

The two main sources a company has to raise money are equity and debt. WACC is the average of the costs of these two sources of finance, and gives each one the appropriate weighting.

Using a weighted average cost of capital allows the firm to calculate the exact cost of financing any project.

WACC Formula

 

 

 

 

The formula for how to calculate WACC may seem complicated but in reality is fairly simple:

  • (Percentage of finance that is equity x Cost of Equity) + (Percentage of finance that is debt x Cost of Debt) x (1 – Tax Rate)

To learn more about this concept and become a master at DCF modeling, you should check out our DCF Modeling Course. Learn more here.

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To learn more about this concept and become a master at valuation modeling, you should check out our Valuation Modeling Course. Learn more here.

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Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.