corporate-finance
WACC is the weighted average cost of capital: the blended required return on the firm's operating capital, after the tax shield on debt. It is the discount rate for unlevered free cash flow in a standard firm DCF.
WACC is how deal teams and CFOs refer to the weighted average cost of capital in one syllable. The working formula (two-source capital structure) is:
WACC = (E/V) × Re + (D/V) × Rd × (1 − Tc)
where E and D are market values, V = E + D, Re is cost of equity, Rd is cost of debt, and Tc is the marginal cash-tax rate that makes the interest shield real. Preferred, if material, gets its own weight and cost.
This page is the acronym as it is spoken: "what's the WACC?", "use 9.5% WACC", "don't WACC a venture like a utility". The long-form page derives each input. Here the focus is correct use of the single rate.
WACC matches free cash flow to the firm (FCFF). It is the discount rate in a standard unlevered DCF. It is the wrong rate for FCFE, for a financing cash flow, and for a project whose risk or gearing differs from the firm. Damodaran's sector WACC files are starting points for operations like these, not a law for your holdco.
Invented Harbourline Components, illustration only.
| Input | Figure | Source of thought |
|---|---|---|
| Risk-free (EUR long) | 2.6% | Long sovereign, currency-matched |
| Unlevered beta analogue | 0.85 | Peer unlevered betas |
| Target D/(D+E) | 25% | Not today's under-geared book |
| Relevered beta | 1.05 | Standard Hamada-style relever |
| ERP | 4.5% | Mature-market premium (analyst choice, disclosed) |
| Size / specific | 1.0% | Documented; easy to abuse |
| Re | 2.6% + 1.05×4.5% + 1.0% = 8.3% | |
| Rd | 5.5% | Debt capacity of this credit |
| Tc | 21% | Cash tax on the shield |
| WACC | 0.75×8.3% + 0.25×5.5%×0.79 ≈ 7.3% | If you add country risk, say so |
A team quoting "WACC 10%" without this table is quoting a mood. Note: if the illustration's 7.3% feels low versus a 9.5% deal WACC, the gap is usually size premium, country risk, or a higher target spread—not a different formula.
IC memos lock a WACC so every case is comparable. Move WACC 100bp and you move EV more than most first-year operating tweaks, because of terminal value. Buyers with a higher hurdle (opportunity cost, fund level) should not silently jack WACC to kill a deal they dislike for other reasons; they should say the hurdle is the fund's, not the asset's.
WACC assumes a stable target structure and a debt tax shield that will be earned. Distressed, hyper-growth unleverable, and project-finance cases often need APV or equity residual models instead. Beta is estimated with error; precision to two decimals is theatre.
Dazur quotes WACC as a short table, not a slogan. Mid-market European processes often need a size and liquidity conversation that Damodaran's mega-cap sector averages do not contain. We would rather argue the 80 basis points in the open than hide them in a round 10%.