How do you calculate WACC?

WACC is the blended after-tax cost of capital, weighted by the target capital structure at market value. The formula: WACC equals (E divided by V) times cost of equity, plus (D divided by V) times cost of debt, times one minus the tax rate.

Cost of equity uses CAPM: risk-free rate, plus levered beta times the equity risk premium. The risk-free rate is typically the 10-year Treasury yield — call it 4.5% in the current environment. Equity risk premium is typically 5-6% — sourced from Damodaran or the firm's standing convention. Beta is the tricky one: I'd pull comparable companies' levered betas, unlever each using their D/E and tax rate, take the median, then re-lever using the target's target capital structure. This gets you a beta that reflects the business risk of the industry, scaled to the target's leverage.

Cost of debt is the yield to maturity on the company's existing debt — for a public issuer, that's observable from bond prices. For a private company, I'd benchmark to peer credit spreads at the same rating or implied rating. Then multiply by one minus the marginal tax rate, since interest is tax-deductible.

Weights: use market-value weights, not book. Equity weight is the market cap. Debt weight is the market value of debt — usually book value for non-distressed credits. Total V is the sum.

A few practical points. One: always use the target capital structure, not the current one, especially for a company that's expected to deleverage. Two: don't double-count by both using a leveraged beta and adjusting cash flows for financing. Three: WACC should be in nominal terms if cash flows are nominal, real terms if cash flows are real — match your cash flow convention.

For a typical large-cap industrial in the current environment, WACC lands between 7% and 10%. For a smaller, riskier business, 11-14%. If your WACC comes out below the risk-free rate or above 20% on a normal company, you've made an error.