WACC: The Discount Rate That Makes or Breaks Your Model — DCF Valuation in Practice

§ 01

AAPL — Debt/Equity, Market Cap. Open AAPL on the Ledge to see current values.

§ 02

WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 − Tax Rate))

§ 03

WACC Range	Typical Companies	Implication
7–8%	Large-cap utilities, stable cash flows	Low risk, high present value
9–11%	Most public companies	Moderate risk
12–15%+	Small-cap, emerging markets, cyclicals	High risk, steep PV discount

§ 04

Cost of Equity uses CAPM: Risk-free rate + Beta × Equity Risk Premium. Every component is debatable — which risk-free rate? Which beta? What ERP? Small changes compound into large valuation differences.

§ 05

Look up a company’s beta in **Fundamentals**. Calculate its cost of equity using CAPM with the current 10-year Treasury yield as the risk-free rate and a 5.5% equity risk premium.

§ 06

Two analysts model the same company. One uses 8% WACC, the other 10%. How different will their valuations be?

§ 07

If your thesis depends on getting WACC exactly right, you don’t have a thesis. A good investment should look attractive across a reasonable range of discount rates (8–12%), not just at the one rate that makes the numbers work.

§ 08

You're DCF-ing a company. WACC inputs: risk-free 4.5%, equity risk premium 5.5%, beta 1.2. Cost of debt 6% (after-tax), D/V = 30%. Walk through what the WACC is and why it matters.

§ 09

Going Deeper — WACC sensitivity is enormous. A 1-percentage-point drop in WACC (10% → 9%), with growth held constant, lifts the terminal value by roughly 50%. Because terminal value typically accounts for 60-80% of DCF enterprise value, that 1pp WACC swing can move your fair-value estimate by 30-40%. The discipline: never quote a single-point WACC. Run the DCF at WACC ± 1pp and growth ± 1pp, and present the resulting valuation range as a 2x2 grid. If the range crosses current price in both directions, you do not yet have a thesis — you have a sensitivity report.

Five questions · AI feedback

Sit with the ideas.

A company has 70% equity and 30% debt. Cost of equity is 11%, cost of debt is 5%, and tax rate is 25%. What is the WACC?

Why:

Sit with the ideas.

Other lessons in this course.