ModeldrillWeighted average cost of capital
A financial modeling exercise from Modeldrill. Solve it with a live spreadsheet grid in your browser, with Fill right and Fill down, and it is checked the moment you submit.
The task
Work out the discount rate for a DCF. Cost of equity (B10) is the risk-free rate plus beta times the equity risk premium. After-tax cost of debt (B11) is the pre-tax cost times one less the tax rate. The weights (B12, B13) use market values of equity and debt. Then fill the WACC in B14.
What this exercise teaches
WACC blends what each provider of capital expects to earn, weighted by how much of the firm each funds. Using the pre-tax cost of debt, or book values instead of market values, are the two most common mistakes and both push the rate in the wrong direction.
A hint if you get stuck
Cost of equity follows the capital asset pricing model. Debt is cheaper after tax because interest is deductible. The two weights must add to 100%.
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