What it means
WACC = (E/V × cost of equity) + (D/V × cost of debt × (1 – tax rate)). It's the discount rate used in DCF valuation models - the minimum return the business needs to generate on capital to satisfy all capital providers.
Why it matters
Small changes in WACC produce large changes in present value of cash flows decades out. Most DCF disagreements between analysts trace back to different WACC assumptions, not different cash flow forecasts.
How to use it
Be transparent about WACC inputs. Use Damodaran's industry betas, real-time cost of debt from yields, and a defensible risk-free rate. Stress-test the valuation across a WACC range, not a point estimate.
Take it further
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