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On Investment Banking

What is WACC, the Weight Average Cost of Capital?

16/10/2012

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by Girl Banker 

Listen to the iTunes podcast instead. 

WACC represents the combined cost of debt and equity   

The free cash flows in Discounted Cash Flow (DCF) Analysis are normally discounted using the weighted average cost of capital, WACC.

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Where:
  • r(d) is the average cost of debt 
  • r(e) is the cost of equity 
  • Debt / (Debt + Equity) is the proportion of debt in the business
  • Equity / (Debt + Equity) is the proportion of equity in the business

r(d)(1 - company's tax rate) is the post tax cost of debt.

E.g. If:
  • r(d) = 6.25%
  • r(e) = 5.58%
  • Debt / (Debt + Equity) = 47%
  • Equity / (Debt + Equity) = 53%
  • Tax rate = 30%
  • WACC = 6.25% x (1 - 30%) x 47% + 5.58% x 53% = 5.02%

You simply can't go to a corporate finance or asset management interview without knowing this formula. It is basic and fundamental.

You might also like:
Where can you get the cost debt used to calculate WACC?
What is the Capital Asset Pricing Model, CAPM?

Who is Girl Banker® and how can she help you?

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    Girl Banker®

    I created my investment banking blog in 2012 as soon as I resigned from i-banking & published my book, To Become An Investment Banker.

    Initially published at girlbanker.com, all posts were later subsumed into my personal website under katsonga.com/GirlBanker.

    With 7 years of front office i-banking experience from Goldman Sachs and HSBC, in both classic IBD (corporate finance) and Derivatives (DCM / FICC), the aim of GirlBanker.com was to make it as straight-forward as possible to get into a top tier investment bank. 


    ​I'm also a CFA survivor having passed all three levels on the first attempt within 18 months - the shortest time possible. 
    ​
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© 2007 - 2025 Heather Katsonga-Woodward, a massive personal finance fanatic.
** All views expressed are my own and not those of any employer, past or present. ** Please get professional advice before re-arranging your personal finances.
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