WACC (Weighted Average Cost of Capital)

WACC weights the cost of equity by equity’s share of capital and the after-tax cost of debt by debt’s share. Because interest is tax-deductible, debt is cheaper than equity in the formula. WACC is the usual discount rate for a company’s free cash flows and a starting point for the hurdle rate on new projects.

For a private company there is no stock price or beta, so the cost of equity is estimated from comparable public companies, adjusted for size and for risks specific to the company, or built up from a risk-free rate and risk premiums. The weights should reflect market values or a target structure, not book values.