Weighted Average Cost of Capital (WACC) is the market-based weighted average of the after-tax cost of debt and cost of equity. It is also the minimum rate of return that investors expect to earn from investing in a company and therefore the appropriate discount rate for the free cash flow (used when conducing a DCF valuation of a firm).
Formula:
WACC = (D/V)kd x (1-t) + (E/V)ke
where:
- D/V = target level of debt to enterprise value (equity plus debt) using market based values.
- E/V = target level of equity to enterprise value using market based values
- kd = cost of debt
- ke = cost of equity
- t = the company's marginal income tax rate
Examples of Company WACCs:
Comcast: 8% (per "Roberts Faces Rocky Road" in January 30, 2008 Wall Street Journal [1])
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