The weighted average cost of capital, WACC for short, is what a company pays for the money it runs on: the return its shareholders require, blended with the interest it pays its lenders, weighted by how much of each the company uses. In Stock Valuation Studio the computed WACC serves as the discount rate in the discounted cash flow model, and this page shows exactly how it is built.
The Formula, in Three Parts
The discount rate blends the two costs of money by their share of the company's funding:
The cost of equity comes from the capital asset pricing model. A stock that swings more than the market must promise more than the market, and beta measures the swing:
The cost of debt is the interest rate the company actually pays, reduced by the tax saving on interest, because interest is deducted before tax:
The Studio fixes the risk-free rate at four percent and the equity risk premium at five percent, both stated on the record of the calculation. Beta is measured, not assumed: sixty monthly returns of the stock against the S&P 500, from the price history. The weights use market value for the equity, the price times the share count, and the total debt from the latest balance sheet.
A Worked Example: Coca-Cola
Coca-Cola, from its fiscal 2025 statements, statement year 2025. The interest expense for the year was $1,654 million on total debt of about $45.3 billion. The effective tax rate printed at 17.88 percent. The build-up:
| Component | Value |
|---|---|
| Risk-free rate (stated assumption) | 4.00% |
| Beta (sixty monthly returns against the S&P 500) | 0.28 |
| Equity risk premium (stated assumption) | 5.00% |
| Cost of equity = 4.00% + 0.28 × 5.00% | 5.41% |
| Pre-tax cost of debt = $1,654 million ÷ total debt | 3.65% |
| After-tax cost of debt = 3.65% × (1 − 17.88%) | 3.00% |
| Weights: equity and debt | 89.84% and 10.16% |
| WACC = 89.84% × 5.41% + 10.16% × 3.00% | 5.17% |
A weighted average cost of capital of 5.17 percent is low, and the components explain why: a defensive stock with a beta under 0.3, and a modest amount of cheap debt. A growth stock with a beta well above one lands far higher, and the same filings-first construction prints it as plainly. This build-up was verified component by component against an independent implementation of the same construction, and every figure agreed.
Why the Rate Matters, and When It Cannot Print
The discount rate is the most powerful input in any discounted cash flow valuation. A lower rate raises every present value; at Coca-Cola's rate of about five percent the same cash flows are worth far more than at the Studio default of nine percent, which is why the choice between the two belongs in the open, on the Assumptions card, and not buried in the model. Conservative practice is to know both numbers: the value at the company's own cost of capital, and the value at a rate that asks more of the investment.
The computed rate also refuses to print when the record cannot support it, and the refusal is part of the design. Apple is the standing example: its interest expense line ends at fiscal 2023 in the standard filing taxonomy, so there is no current cost of debt to build from, and the Studio will not construct a rate on a stale part. A company with a loss year and no effective tax rate is refused on the same ground. In those cases the workup holds the stated rate of nine percent and says why.
Best for operating companies with a complete filing record: a measured beta, a current interest expense, debt on the balance sheet, and a tax rate the statements support. Not for banks and insurers, whose funding is their business and whose cost of capital is not read this way; the better tools for those companies price earnings and book value, on the models hub. Not for a company with no interest line to measure: there is no cost of debt to blend, and the honest rate is the cost of equity alone, which the free cash flow to equity model applies directly.
Questions
Should the DCF always use the computed WACC? No. The computed rate describes the company cost of money. The rate a buyer requires can reasonably be higher, and the Studio treats nine percent as the default for that reason. The sensitivity table on the DCF card shows what each rate does to the value.
Why are the risk-free rate and the premium fixed? Because they are market-wide assumptions, not company facts. Fixing them at stated values keeps every company build-up comparable, and any reader can recompute the cost of equity by hand from the printed beta.
Where does beta come from? From the price history the Studio already keeps: sixty paired monthly returns of the stock and the S&P 500, the standard five-year monthly window used across the industry.
Free Tool
Open the Studio on the discounted cash flow model, then set the discount rate on the Assumptions card to the weighted average cost of capital. The workup computes the build-up for the ticker on screen from its filings and its price history, and the DCF re-runs on the result.
WACC CalculatorOpen in Stock Valuation Studio →Twelve Stocks With a Complete Cost of Capital
Every tile opens Stock Valuation Studio on the discounted cash flow model, where the computed cost of capital can serve as the discount rate. The link sets the model only; enter the ticker in the Studio to see its build-up.