Weighted average cost of capital
The return a business must earn before it has created anything.
WACC is the blended return demanded by everyone who funded the business (lenders and shareholders), weighted by how much of the capital each provides. It is the hurdle: a project returning less than WACC destroys value even if it is profitable in accounting terms. In a DCF it is the discount rate, which makes it the assumption with the greatest leverage over your final number.
What this course covers
- 01Take the risk-free rate
- 02Estimate beta properly
- 03Apply CAPM for the cost of equity
- 04Find the cost of debt
- 05Weight at market values and blend
What you will be able to do
- Discounting unlevered free cash flow in a DCF
- Setting an internal hurdle rate for capital projects
- Testing whether a business earns above its cost of capital (ROIC vs WACC)
Where it does not apply
- Discounting levered cash flow; use the cost of equity instead
- Financial institutions, where the concept of "debt funding" is not separable from operations
- A business whose capital structure is about to change fundamentally, such as an LBO target; model the changing structure explicitly instead
Predict it first
Not markedThe capital structure is refinanced towards more debt. The cost of debt, the cost of equity and every operating assumption stay exactly where they are.
ChangeDebt weight: 25% → 45%
How this prepares you for the assessment
This is one of 17 courses, and none of them is required for the Verified Valuation Assessment. The credential is earned on two timed drills, graded by the same engine that checks this course, and the drill score decides what it says you are capable of, from Foundation through to Distinction.
- Distinction90%+Works independently across all three core methods.
- Merit75%+Builds the core models with limited supervision.
- Pass60%+Understands the mechanics; works through a model with guidance.
- FoundationcompletedKnows the vocabulary and the shape of each model.