WACC = (E/V) x Re + (D/V) x Rd x (1 - Tc); where V = E + D, Re = cost of equity, Rd = cost of debt, Tc = tax rate
WACC blends the cost of equity and debt into one required return.
What it is
WACC is the average cost of every dollar a company uses to fund itself, weighting the cost of debt and the cost of equity by how much of each it has. It is the discount rate most often used in a discounted cash flow (DCF) model to value the whole firm. Because debt holders are paid before shareholders, debt is usually cheaper than equity.
Why it matters
WACC is the hurdle rate: a project or company that earns more than its WACC creates value, and one that earns less destroys it. In a DCF, even a small change in WACC can swing the estimated value substantially, so it is one of the highest-leverage inputs in any valuation.
How it's calculated
Weight the after-tax cost of debt and the cost of equity by the market-value share of debt and equity in the capital structure, then add them. Interest is tax-deductible, so the debt portion is multiplied by (1 minus the tax rate).
How Quintarthai uses it
Quintarthai surfaces the inputs behind WACC — beta, debt load, and effective tax rate — on a company's deep-analysis pages, so you can sanity-check the discount rate a model uses.
Cross-border note. Use a risk-free rate that matches the cash-flow currency: Canadian government bond yields for a CAD-denominated TSX company, US Treasury yields for a USD model. The statutory tax rate also differs — Canadian combined federal/provincial corporate rates run roughly 23-31% versus the US federal 21% plus state tax.
FAQ
Should I use book values or market values for the debt and equity weights?
Market values. Equity weight should use market capitalization, not book equity, and debt should use market or fair value where available. Book weights can badly distort the result for companies whose share price differs from book value.
Why is the cost of debt multiplied by (1 - tax rate)?
Because interest payments are tax-deductible, debt effectively costs the company less than its stated interest rate. The tax shield lowers the true after-tax cost of borrowing.
Check your understanding
Why is the cost of debt multiplied by (1 - tax rate) in the WACC formula?
Interest is tax-deductible, so the tax shield reduces the effective cost of borrowing, which is why the debt term is multiplied by (1 - tax rate).