Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) is the rate of return required by all of a company's capital providers — equity holders and lenders — weighted by their respective proportions in the capital structure. WACC = ke × (E/V) + kd × (1-t) × (D/V), where ke is the cost of equity, kd the cost of debt, t the tax rate, and E/V, D/V are the equity and debt weights. It is the discount rate in enterprise-level DCF models and the hurdle rate for value-creating investments. See our comprehensive guide on WACC construction and application.

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Example: a Swiss industrial SME WACC: cost of equity 11.3% (CAPM + size premium 2.5% + SCRP 1.5%) × 60% weight + after-tax cost of debt 3.4% (5.0% × (1-14%)) × 40% weight = 6.8% + 1.4% = 8.2%. A 1% increase in WACC to 9.2% reduces the DCF enterprise value by approximately 10–15% — illustrating why WACC is the most value-sensitive parameter in any DCF model.

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Hectelion constructs and justifies every WACC parameter by parameter with market-referenced documentation, producing discount rates defensible before tax authorities, auditors and courts.