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What is Weighted Average Cost of Capital (WACC)?

WACC is the average rate a company pays to finance its assets, blending the cost of equity and the after-tax cost of debt.

PrepClever Glossary · Equity

updateUpdated July 2026

Formula

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

WACC represents the minimum return a company must earn on its existing assets to satisfy all its capital providers. It is the discount rate most commonly used in a DCF valuation, because it reflects the blended required return of both shareholders and lenders.

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Example

A firm 60% equity (cost 12%) and 40% debt (after-tax cost 6%) has WACC = 0.6×12% + 0.4×6% = 9.6%.

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Relevant NISM series

CFANISM Series XV

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Glossary

FAQs about Weighted Average Cost of Capital (WACC)

Why is WACC used as a discount rate?add

Because it captures the blended required return of everyone who funds the business — equity and debt holders — so discounting future cash flows at WACC gives the value available to all capital providers.

Where to go from here

Weighted Average Cost of Capital (WACC) is one term in a much larger syllabus. These are the fastest routes into the rest of it.

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What is Weighted Average Cost of Capital (WACC)?

Related Terms

Discounted Cash Flow (DCF)

Cost of Equity

CAPM

FAQs about Weighted Average Cost of Capital (WACC)

Where to go from here

Master every term that matters

What is Weighted Average Cost of Capital (WACC)?

Related Terms

Discounted Cash Flow (DCF)

Cost of Equity

CAPM

FAQs about Weighted Average Cost of Capital (WACC)

Where to go from here

Master every term that matters