Knowledge Base

WACC — Weighted Average Cost of Capital

WACC = (E/V × Re) + (D/V × Rd × (1−T))

WACC is the average rate a company pays to finance its assets (Equity + Debt).

Equity is more expensive than debt because it carries more risk.

Debt has tax benefits — interest payments are deductible (the "Tax Shield").

Used as a "Discount Rate" in DCF models to find the value of a business.

A company is "creating value" if its ROIC (Return on Capital) is higher than its WACC.

Pro Tip

When analyzing a company, check if their returns exceed their WACC. If not, they are technically "destroying value" even if they show profit.

WACC — Weighted Average Cost of Capital - Complete Guide

Everything you need to know about WACC and how to optimize your financial strategy.

Understanding the Formula

The core calculation is based on:

WACC = (E/V × Re) + (D/V × Rd × (1−T))

Key Concepts & Rules

WACC is the average rate a company pays to finance its assets (Equity + Debt).

Equity is more expensive than debt because it carries more risk.

Debt has tax benefits — interest payments are deductible (the "Tax Shield").

Used as a "Discount Rate" in DCF models to find the value of a business.

A company is "creating value" if its ROIC (Return on Capital) is higher than its WACC.

Expert Strategy

When analyzing a company, check if their returns exceed their WACC. If not, they are technically "destroying value" even if they show profit.

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