WACC

Weighted average cost of capital blends the cost of equity and the after-tax cost of debt, weighted by the market values of each in the firm's capital structure. It is the discount rate used in enterprise-value DCFs (where the cash flow being discounted is FCFF — cash available to all capital providers). The mechanics are straightforward: Ke is computed via CAPM, Kd is the company's marginal pre-tax borrowing rate, the tax shield on debt is captured by multiplying Kd by one minus the marginal tax rate, and the two are blended by the equity-to-enterprise-value and debt-to-enterprise-value weights. The judgment lives in three places. First, weights should be at market value, not book value, because the question is what discount rate would a marginal capital provider demand today. Second, the tax shield assumes the company is profitable enough to use the deduction; for unprofitable companies the shield is illusory. Third, WACC is sensitive to capital-structure assumptions — a company that we expect to delever toward an industry-norm leverage will have a different forward WACC than its current snapshot suggests. We always document the WACC inputs (risk-free rate, equity risk premium, beta source, debt yield, tax rate) in the appendix so the discount rate can be audited and stress-tested.