What is the WACC or cost of capital and how is it calculated?
Updated June 27, 2026 · DeepTicker
The WACC (Weighted Average Cost of Capital) is the minimum return a company must generate to satisfy both its shareholders and its creditors at the same time. It is the discount rate with which future cash flows are brought to the present: in stable sectors it is around 5-7% and in risky businesses or those highly dependent on growth it can exceed 9-10%.
What WACC is and why it matters
The WACC or cost of capital answers a simple but decisive question: how much does the money a company operates with cost it? Every company is financed by two sources: equity (shares, that is, the money shareholders put in) and debt (loans and bonds). Each source demands a return: the shareholder wants compensation for the risk they take and the bank charges interest. The weighted average cost of capital is, literally, the average of those two costs, weighted by how much each one weighs in the financial structure.
Why the WACC matters so much: it is the discount rate used in any discounted cash flow valuation (DCF). A euro you will collect in ten years is worth less today than a euro in your pocket, and the WACC is precisely the rate at which that future euro 'shrinks'. If you discount with a WACC of 6%, distant flows keep a lot of value; if you discount with a WACC of 10%, that same future is worth considerably less. Hence two analysts projecting exactly the same earnings can reach very different values just by using a different cost of capital.
The WACC therefore blends the cost of equity (what the shareholder demands, usually estimated with the CAPM model) and the cost of debt after tax (because interest is tax-deductible, which makes debt cheaper than equity). The more weight cheap debt has, the lower the WACC tends to be; but beware, too much debt raises the risk of bankruptcy and shareholders start demanding more, so there is an optimal point.
An idea worth fixing: the WACC is not a figure companies publish in their accounts. It is an estimate, and that's why it is one of the most manipulable (consciously or unconsciously) parameters of any valuation. Raising or lowering the cost of capital by half a point can change the estimated value of a stock by 15-30%. Whoever controls the WACC controls the result. That's why transparency about which WACC is used is as important as the number itself.
The cost of capital also works as a yardstick for a business's profitability. If a company earns a ROIC (return on invested capital) above its WACC, it is creating value: it earns more than the money costs it. If its ROIC is below the WACC, it is destroying value even if it shows positive accounting earnings. This comparison —ROIC versus WACC— is one of the quality filters most used by professional investors.
It is worth distinguishing the WACC from similar concepts. The risk-free rate (the 10-year government bond) is only one of the ingredients. The market risk premium is the extra the investor demands for investing in stocks instead of safe bonds. The beta measures how much the stock moves relative to the market. The WACC combines them all. Don't confuse it either with the expected return of your investment: the WACC is the cost for the company, not necessarily what you are going to earn.
Finally, the cost of capital is not universal: it changes by country (financing in Germany is not the same as in Turkey), by sector (a regulated bank has a different risk profile to a biotech) and by point in the cycle (when interest rates rise, the WACC of almost the whole market rises with them). Using a generic WACC of 8.5% for any company, as many simplistic calculators do, is one of the most expensive mistakes made when valuing stocks.
How WACC is calculated
WACC = (E / V) × Ke + (D / V) × Kd × (1 − T)
- · E: value of equity (market capitalization, what the whole set of shares is worth)
- · D: value of the company's net financial debt
- · V: total value of the financing, that is E + D
- · Ke: cost of equity, what the shareholder demands (usually estimated with the CAPM: risk-free rate + beta × market risk premium)
- · Kd: cost of debt, the average interest rate the company pays on its loans and bonds
- · T: tax rate, which reduces the real cost of debt because interest is tax-deductible
Example of WACC
Imagine a company with a market capitalization of €800 million (equity, E) and €200 million of debt (D), so the total V is €1,000 million. Equity weighs 80% and debt 20%. Suppose the shareholder demands a cost of equity (Ke) of 9% and that the company pays a cost of debt (Kd) of 4%, with a tax rate (T) of 25%.
We apply the formula: the equity part contributes 0.80 × 9% = 7.2%. The debt part contributes 0.20 × 4% × (1 − 0.25) = 0.20 × 4% × 0.75 = 0.6%. Adding up: WACC = 7.2% + 0.6% = 7.8%. That 7.8% is the minimum return the business must generate so as not to destroy value, and the rate with which we would discount its future flows.
Now the practical lesson: if that same company were a software firm, its real WACC by industry would be around 9.5%, while a utility (regulated power company) would have a WACC close to 6% and a bank, by its nature, comes close to 5%. Discounting the same flows at 6% or at 9.5% can change the estimated value of the stock between 15% and 30%. That's why using the correct cost of capital by sector is not an academic detail: it is the difference between getting it right and fooling yourself.
How to interpret WACC
- →A WACC between 5% and 7% is common in stable, regulated businesses or those with a very healthy balance sheet; it reflects low perceived risk.
- →A WACC of 9-11% or more usually appears in cyclical, technological, highly indebted sectors or in higher-risk countries.
- →Always compare the WACC with the ROIC: if the ROIC exceeds the WACC, the company creates value; if it falls below, it destroys it, even with accounting earnings.
- →A drop in the WACC raises the estimated value of the stock, and a rise reduces it; that's why it is the most sensitive parameter of any DCF valuation.
- →Do not use a universal WACC of 8.5%: use the cost of capital specific to the sector, which can easily vary between 5% and 10%.
- →When central-bank interest rates rise, the WACC of almost all companies rises, which pushes market valuations down.
Common mistakes with WACC
- ✕Using a generic WACC (typically 8.5%) for any company instead of the real cost of capital by sector, which distorts the value by 15-30%.
- ✕Confusing the WACC with the return you will get: the WACC is the cost for the company, not your expected return as an investor.
- ✕Manipulating (or accepting without questioning) an artificially low WACC just to make an expensive stock look reasonable.
- ✕Forgetting the tax shield of debt: interest is deductible, so the real cost of debt is Kd × (1 − tax), not Kd alone.
- ✕Comparing the WACC of companies from different sectors as if they were interchangeable, ignoring that each industry has its own risk profile.
How the WACC is calculated step by step (formula explained)
Calculating the WACC has three blocks. First, the cost of equity (Ke): it is estimated with the CAPM, which starts from the risk-free rate (the 10-year sovereign bond), adds the market risk premium multiplied by the stock's beta. A beta of 1.2 means the stock moves 20% more than the market, so the shareholder demands more return for that greater swing.
Second, the cost of debt (Kd): it is the average interest rate the company pays on its loans and bonds, adjusted for the tax shield. Since interest is a deductible expense, the real cost of debt falls when multiplied by (1 − T). Debt at 4% with a 25% tax rate actually costs 3%.
Third, the weightings: how much each source weighs on the total. Market values are used, not accounting ones: market capitalization for equity and net financial debt for debt. You multiply each cost by its weight, add them up and get the WACC. It looks complex, but the concept is simple: a weighted average of what each euro that finances the business costs.
WACC by sector: what is considered high or low
There is no good or bad WACC in the abstract; there is a normal WACC by sector. There are public references that compile the real cost of capital by industry. Some indicative examples: Advertising ~7.8%, Banks ~5%, Software ~9.5%, Utilities ~6%. Stable and regulated businesses have low WACCs; cyclical, technological or highly indebted ones have high WACCs.
A low WACC usually indicates a business perceived as safe and predictable: recurring revenue, little sensitivity to the cycle, a healthy balance sheet. A high WACC signals greater uncertainty: either the business is volatile, or the country is risky, or the company is highly leveraged. It is not that one is better than the other; it is that risk is paid for, and the cost of capital reflects it.
The classic mistake is to compare the WACC of companies from different sectors as if they were the same. A utility with a WACC of 6% and a biotech with a WACC of 11% are not comparable: they live in different risk worlds. That's why any serious valuation starts from the WACC specific to the industry, not from an invented universal number.
Why the WACC changes the value of a stock so much
The WACC enters the valuation as a denominator: each future flow is divided by (1 + WACC) raised to the years remaining. Since in a DCF valuation most of the value usually lies in the distant flows and the terminal value, a small variation in the cost of capital is amplified enormously. Lowering the WACC from 9% to 7% can inflate the estimated value by 30% or more.
This sensitivity explains why the WACC is such a delicate parameter. An analyst who wants to "justify" a high price just has to quietly lower the cost of capital by half a point. That's why, more than the final number, it matters to know which WACC has been used and where it comes from. A valuation that does not disclose its WACC is a black box.
The consequence for you as an investor: be wary of valuations that depend on a very low WACC to add up. If a stock only looks cheap with a cost of capital of 5% in a sector where 9% is normal, it is not that it is cheap: it is that they are forcing the rate. The correct WACC is your defence against self-deception.
How DeepTicker uses the WACC in its valuation
DeepTicker does not invent a generic WACC: it uses the real cost of capital by industry from public references, the same approach serious fundamental analysis applies. So, when valuing a software stock it uses its WACC ~9.5%, and when valuing a utility it uses its ~6%. That rigour avoids the bias of the generic 8.5% rate that distorts so many home-made valuations.
The WACC feeds DeepTicker's Reverse DCF. Instead of telling you "this stock is worth €X", the tool calculates, with the correct cost of capital, what growth and what margin the current price is pricing in and lets you judge whether you believe it. Because every number comes explained —including the WACC that has been applied— there is no black box: you see where the result comes from.
This is the spirit of the platform: serious fundamental analysis, but made simple so that anyone can use it without knowing finance or building spreadsheets. And because you see how it is calculated, you learn by using it. Remember that this is information and analysis, not financial advice: the final decision, combining quality and valuation, is always yours.
On DeepTicker you get this metric calculated and explained for thousands of stocks, with no spreadsheets.
Try DeepTicker free →Frequently asked questions about WACC
What exactly does WACC mean?
WACC stands for *Weighted Average Cost of Capital*. It is the average of the cost of equity and of debt, weighted by how much each one weighs in the company's financing.
Is a high WACC good or bad?
Neither good nor bad in itself: a high WACC indicates that the market perceives more risk in that business, so it demands more return. What matters is to compare it with the company's ROIC to see whether it creates or destroys value.
How is the cost of capital of a stock calculated?
You combine the cost of equity (estimated with the CAPM: risk-free rate + beta × market premium) and the cost of debt after tax, weighting each one by its weight in the total financing.
What is a normal WACC by sector?
It depends on the risk of the sector. As an indicative reference by sector: Banks ~5%, Utilities ~6%, Advertising ~7.8% and Software ~9.5%. Stable businesses have low WACCs and volatile ones, high WACCs.
Why does the WACC change the value of a company so much?
Because it is the discount rate of future flows, and most of the value lies in the distant flows. Varying the WACC by half a point can move the estimated value between 15% and 30%.
What is the relationship between WACC and ROIC?
The ROIC measures what the company earns for every euro invested and the WACC what that euro costs it. If ROIC > WACC, it creates value; if ROIC < WACC, it destroys it despite having accounting earnings.
How do I see the WACC that DeepTicker uses for a stock?
DeepTicker applies the real WACC by industry from public references by sector and shows it transparently within its Reverse DCF, next to the rest of the calculation, so you see where each figure comes from.
Educational content by DeepTicker. This is not financial advice or a recommendation to buy or sell. Investing involves risk of loss.
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