Cost of Capital

Economics

Cost of capital is the rate of return investors require to provide capital to a business — combining cost of equity and cost of debt. Weighted Average Cost of Capital (WACC) = (Equity % × Cost of Equity) + (Debt % × Cost of Debt × (1 – tax rate)). WACC is the discount rate used to evaluate investment decisions — projects earning more than WACC create value; below WACC destroys value. Cost of equity typically estimated via CAPM: Risk-Free Rate + Beta × Equity Risk Premium. WACC ranges 6-12% for large US companies, higher for smaller or riskier firms. Falling WACC (low rates) drives M&A and growth investment; rising WACC cools it.