| Type | Valuation Input / Hurdle Rate |
| Key Components | Cost of Equity + Cost of Debt |
| Target Constraint | ROIC > WACC (Value Creation) |
| Primary Use | The discount rate in a DCF model |
formulaWACC = (E/V × Re) + [(D/V × Rd) × (1 - T)]
Where:
E = Market value of equity
D = Market value of debt
V = Total Market Value (E + D)
Re = Cost of equity
Rd = Cost of debt
T = Corporate tax rateThis looks complicated, but it simply blends the interest rate a company pays on its loans with the expected
return demanded by stock market investors, weighted by how much of the company is funded by each. The debt
side is multiplied by (1 - T) because interest payments are historically tax-deductible.
WACC serves as the "Hurdle Rate." If a CEO is considering building a new $50M factory, and the company's WACC is 8%, the factory MUST generate a return above 8%. If they build a factory that only generates a 5% return, they are actively destroying shareholder value because the capital costs more than it yields.
WACC is the exact percentage used to discount cash flows.
The ROIC vs. WACC spread determines if a company actually creates value.