Cost of capital (WACC)
CAPM, after-tax debt, target weights.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: cost of capital (wacc).Updated 30 September 2026
What it does
The discount rate for unlevered cash flows. Cost of equity comes from the capital asset pricing model: risk-free rate plus beta times the equity risk premium. Cost of debt is the pre-tax rate less the tax shield. The two are weighted at a target capital structure, because the valuation is of the business rather than of today’s balance sheet.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 16–20: Risk-free rate, Equity risk premium, Levered beta, Pre-tax cost of debt…
- WACC, row 5: Cost of equity = rf + β × ERP
- WACC, row 8: After-tax cost of debt = kd × (1 − t)
- WACC, rows 11–13: Equity weight, Debt weight, WACC
What a reviewer looks for
- A raw beta from a peer with a different capital structure, never unlevered and relevered.
- Today’s weights for a company mid-way through a recapitalisation.
- A cost of debt below the risk-free rate.
Learn it, then build it
Understand · Primer
DCF Valuation
Build · Lab · ~12 min
WACC Builder
Build a discount rate you can defend line by line: beta, equity risk premium and cost of debt, each from a source you can name.
Build · Lab · ~10 min
Beta Refresher
Estimate a beta, see how far one regression lands from the truth, and know when to use raw, adjusted, unlevered or bottom-up.
Read · Guide · 12 min
How to Build a DCF Model: Build Order, Terminal Value and the Sanity Checks
Read · Guide · 8 min
DCF Interview Questions: The Ones That Actually Come Up
Vocabulary: WACC.