![]() WACC = Cost of Equity * % Equity + Cost of Debt * (1 – Tax Rate) * % Debt + Cost of Preferred Stock * % Preferred Stockįinding the percentages is basic arithmetic – the hard part is estimating the “cost” of each one, especially the Cost of Equity. Unlevered beta calculator how to#How to Calculate Discount Rate: WACC Formula “Capital” just means “a source of funds.” So, if a company borrows money in the form of Debt to fund its operations, that Debt is a form of capital.Īnd if it goes public in an IPO, the shares it issues, also called “Equity,” are a form of capital. The name means what it sounds like: you find the “cost” of each form of capital the company has, weight them by their percentages, and then add them up. ![]() Normally, you use something called WACC, or the “Weighted Average Cost of Capital,” to calculate the Discount Rate. The Discount Rate also represents your opportunity cost as an investor: if you were to invest in a company like Michael Hill, what might you earn by investing in other, similar companies in this market? The Discount Rate represents risk and potential returns, so a higher rate means more risk but also higher potential returns. ![]() The Discount Rate goes back to that big idea about valuation and the most important finance formula: Premium Course Signup Discount Rate Meaning and Explanation ![]()
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