What is Weighted Average Cost of Capital (WACC)?

Weighted Average Cost of Capital (WACC) is a calculation of a company's cost of capital in which each category of capital (equity and debt) is proportionately weighted. WACC represents the blended cost of capital for a firm from all sources and is often used as a discount rate in DCF valuations.

For Startups: For an early-stage startup funded purely by equity, the WACC is simply its cost of equity, which is very high due to the risk involved. As a company matures and takes on debt (which is cheaper than equity), its WACC will decrease. A lower WACC can lead to a higher valuation and is a sign of a more mature and stable capital structure.

Calculation: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is equity, D is debt, V is total capital, Re is cost of equity, Rd is cost of debt, and Tc is the tax rate.