DCF & WACC
What is WACC and how do you calculate it?
Model answer
Weighted average cost of capital - the blended required return of all capital providers, used as the DCF discount rate. WACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate), where E and D are market values of equity and debt and V = E + D. Cost of equity usually comes from CAPM: risk-free rate + beta x equity risk premium.
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