WACC: The Simplified Discount Rate For Company Valuation

This diagram explains WACC (Weighted Average Cost of Capital) as the simplified discount rate for comany valuation.

Key Points:

• WACC definition: Represents the blended threshold return required by investors and creditors, weighted by their share of total funding.

• Funding sources: Debt, hybrid instruments (perpetuals, preferred shares, convertibles), and equity contribute to total capital.

• Economic balance sheet: Matches the company’s assets with its funding sources.

• Value creation condition: Project returns (IRR, NPV) must meet or exceed WACC to generate shareholder value.

• Role in valuation: Used as the discount rate in company valuation models.