What is WACC and how do you calculate it?

WACC is the weighted average cost of capital. It's the blended return that a company's debt and equity investors require. In a DCF, it's the discount rate for unlevered free cash flows. That works because those cash flows belong to both debt and equity investors. The formula is the cost of equity times the equity weight, plus the cost of debt times one minus the tax rate times the debt weight. The weights are equity and debt as a share of total capital. I'd use market values for those, not book values, so equity is the market cap. The cost of equity comes from CAPM. That's the risk-free rate plus beta times the equity risk premium. The cost of debt is the yield on the company's debt. I multiply it by one minus the tax rate because interest is tax deductible.

WACC is the weighted average cost of capital. It's the blended return that a company's debt and equity investors require. In a DCF, it's the discount rate for unlevered free cash flows. That works because those cash flows belong to both debt and equity investors. The formula is the cost of equity times the equity weight, plus the cost of debt times one minus the tax rate times the debt weight. The weights are equity and debt as a share of total capital. I'd use market values for those, not book values, so equity is the market cap. If there's preferred stock, it gets its own term. The cost of equity comes from CAPM. That's the risk-free rate plus beta times the equity risk premium. The risk-free rate is usually the ten-year government bond yield, and I'd get beta by unlevering the betas of comparable companies and relevering at the target capital structure. The cost of debt is the yield on the company's debt. I multiply it by one minus the tax rate because interest is tax deductible. Two things I'd keep in mind. Debt is usually cheaper than equity, because lenders get paid first and interest is deductible. And a higher WACC means a lower valuation, since future cash flows are discounted more heavily.