Weighted average cost of capital (WACC)

WACC turns a company’s mix of funding into one rate. BDC describes it as the average rate a business pays to finance its assets, calculated by averaging the rate on all sources of capital, both debt and equity, weighted by the proportion of each. CBV Institute describes it as a measure of overall cost of capital with each component weighted at market value by its share of the capital structure.

What moves it

BDC says the cost of equity is generally higher than the interest rate on debt, and that more debt as a share of total capital generally lowers WACC. CBV Institute defines a discount rate as a rate of return used to convert economic income into present value; the discounted cash flow entry explains that method, and business valuation methods compared shows where it fits.

What to check or ask

• Whether a valuation’s discount rate was built from a WACC, and from which inputs
• How the debt and equity weights were chosen
• Whether a separate risk premium was added for a small business