WACC Explained: Discount Rates in Stock Valuation
WACC explained: what the weighted average cost of capital is, why discount rates matter, and how investors think about risk in valuation.
What is WACC?
WACC is the blended cost of equity and debt. In DCF, it is used to discount future cash flows back to today’s value.
Why it matters
- Higher risk → higher discount rate → lower present value
- Discount rates can dominate DCF outcomes
- Use conservative assumptions
Small changes in WACC can swing fair value significantly. Treat discount rates as a range, not a single point.
Connect WACC to DCF
If you use DCF, understand discount rates. Then cross-check with other methods and margin of safety.
FAQs
Is WACC the same as cost of equity?▼
No. WACC blends cost of equity and after-tax cost of debt. Cost of equity applies to equity cash flows.
What’s a “normal” WACC?▼
It varies by sector and risk. Stable businesses can have lower WACC than highly cyclical or leveraged companies.
Related
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