The Weighted Average Cost of Capital (WACC) is a crucial metric in corporate finance, representing the average rate of return a company is expected to pay to all its different security holders (both debt and equity) to finance its assets. It is most frequently used as the discount rate in a Discounted Cash Flow (DCF) valuation model to determine a company’s intrinsic value.

A lower WACC is generally favorable, as it indicates lower financing costs and suggests the company can create value more easily.

The WACC Formula

WACC is a weighted average that combines the costs of a company’s different sources of capital—primarily equity and debt—based on their proportion in the company’s capital structure.

The standard formula for WACC, considering only debt and common equity, is:

$$WACC = \left( \frac{E}{V} \times r_e \right) + \left( \frac{D}{V} \times r_d \times (1-T_c) \right)$$

Where:

Variable	Description
$\frac{E}{V}$	Weight of Equity: The proportion

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