What is Wacc?

WACC stands for the weighted average cost of capital. It is the risk-adjusted cost of capital and is calculated by taking a weighted average cost of the different securities that a firm has in its capital structure. The formula that is typically used for a company with only equity and debt in its capital structure is r(wacc) = r(equity) * value of the equity / value of the firm + r(debt) * (1-T) * value of the debt / value of the firm, where r(equity) is the cost of equity capital, r(debt) is the cost of debt capital and T is the company’s marginal tax rate. The WACC is used to discount a company’s unlevered free cash flows back to the present and thus find their value. The WACC discount rate takes the value of the interest tax shields into account and so there is no need to add them back after discounting the unlevered free cash flows.