7.4·6 min read
Assembling WACC End to End
With cost of equity, cost of debt, weights, and tax in hand, WACC is one line. Watch it drive the entire valuation.
By the end you can
- ✓Combine all inputs into a final WACC
- ✓Appreciate how sensitive value is to WACC
Everything comes together here. You have the (), the (market yields), the tax rate, and the target weights. Drop them into the formula.
Worked example · WACC for Max's Bikes
Given
- • R_e: 11.1% (from 7.2)
- • R_d: 5%; tax rate T_c: 21%
- •Weights: D/V = 30%, E/V = 70%
Solution
- 1.After-tax debt term
- 2.Equity term
- 3.Sum
Answer
≈ 9.0%. This single rate discounts every and the - so getting it right matters enormously.
WACC is a value lever, handle with care
Because uses ( - g) in the denominator, a swing of even 0.5% in can move by double-digit percentages. This is also why is a favorite knob for 'massaging' a valuation - more on that in the Nike capstone.
Check yourself
Cost of equity 12%, after-tax cost of debt 4%, capital structure 25% debt / 75% equity. WACC is:
Practice in the simulator
Lock it in by building it yourself in a live, graded spreadsheet.