Glossary
Weighted Average Cost of Capital (WACC)
Blended after-tax cost of a firm's debt and equity — the standard DCF discount rate.
Weighted Average Cost of Capital blends the after-tax cost of debt and the cost of equity, weighted by their proportions in the firm's capital structure. It is the standard discount rate for DCF valuations and the corporate hurdle rate for new projects.
WACC = (E/V × Re) + (D/V × Rd × (1 − Tax Rate)), where E is equity value, D is debt value, V = E + D, Re is the cost of equity (usually via CAPM), and Rd the pre-tax cost of debt.
A project earning above WACC creates economic value; one below destroys it. WACC rises with leverage past an optimal point as default risk climbs.