WACC (Weighted Average Cost of Capital)

WACC is the blended rate a company pays for its capital, weighting the cost of equity and the after-tax cost of debt by their share of the capital structure. The formula: WACC = (E/V) x cost of equity + (D/V) x cost of debt x (1 - tax rate), where E is equity value, D is debt, and V is E + D.

In a DCF, WACC is the discount rate — the hurdle future cash flows must clear to be worth anything today. Small changes swing valuations hard: dropping the discount rate from 10% to 8% on a stream of distant cash flows can raise the present value by a third or more, which is why analysts fight over WACC assumptions more than over next quarter's revenue.

The equity piece is the soft spot. Cost of debt is observable (the company's bond yields), but cost of equity comes from a model, usually CAPM, which leans on beta and an assumed equity risk premium. Two careful analysts can defensibly land 2 percentage points apart, so treat any single WACC as an estimate with a range around it.