ValuratorExplore Company Valuations

Weighted Average Cost of Capital (WACC)

For informational and educational purposes only • Not investment advice.

Apple

iPhone, services, devices

WACC Discount Rate

10.4%

Moderate discount rate

Cost of Equity: 10.5%

After-Tax Cost of Debt: 3.3%

Companies are financed by shareholders and lenders, and both expect a return on the money they provide. WACC combines these returns into a single discount rate that is used to estimate the value of a business.

How WACC is Built

WACC = Equity Weight × Cost of Equity (CAPM) + Debt Weight × After-Tax Cost of Debt

Equity

Equity Weight × Cost of Equity =

98% × 10.5%

10.3%
+

Debt

Debt Weight × After-Tax Cost of Debt =

2% × 3.3%

0.1%
=

WACC

Weighted Average Cost of Capital =

10.3% + 0.1%

10.4%
Equity Contribution
10.3%
Debt Contribution
0.1%
WACC
10.4%

Key WACC Metrics

Risk-Free Rate
%
Range: 0–20%
Equity Risk Premium
%
Range: 2–10%

Notes

• Reported Interest Expense is unavailable, so the model uses a default Pre-Tax Cost of Debt of 4.0%.

What is WACC?

Companies finance their operations through a combination of equity and debt. Shareholders and lenders both provide capital and expect a return in compensation for the risk they take. The required return on equity is represented by the Cost of Equity, while the required return on borrowed capital is represented by the Cost of Debt.

Equity generally carries a higher required return because shareholders bear greater risk, while debt financing benefits from contractual interest payments and typically has priority over equity. In addition, interest expense is generally tax deductible, so WACC uses the After-Tax Cost of Debt when measuring the effective cost of borrowing.

WACC combines these financing costs into a single weighted rate based on the company's capital structure. The Cost of Equity and After-Tax Cost of Debt are weighted according to the relative contribution of equity and debt to total capital. The resulting WACC represents the company's overall Cost of Capital and is commonly used as a discount rate in enterprise valuation.

How the WACC Model Works

The WACC model estimates the required return on equity and debt, determines how much each source contributes to the company's capital structure, and combines them into a single weighted discount rate.

Estimate Cost of Equity
→
Estimate Cost of Debt
→
Determine Capital Structure
→
Calculate WACC

WACC Formula

WACC=ED+ERE+DD+ERD(1−T) \text{WACC} = \frac{E}{D+E} R_E + \frac{D}{D+E} R_D (1-T)

Key Model Assumptions

• Cost of Equity is estimated using the Capital Asset Pricing Model (CAPM).
• The Risk-Free Rate represents the return available on a nearly risk-free investment and provides the baseline for estimating the Cost of Equity.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• The Equity Risk Premium represents the additional return investors require for bearing systematic equity market risk.
• Cost of Debt is estimated from the company's Interest Expense and total debt. Trailing twelve-month (TTM) Interest Expense is used when available; otherwise, the latest annual Interest Expense is used.
• The Tax Rate is estimated from trailing twelve-month (TTM) tax data when available; otherwise, the latest annual tax data is used. If valid tax data is unavailable, a default Tax Rate is applied.
• The tax benefit of interest is reflected through the After-Tax Cost of Debt.
• Equity and debt are weighted using their relative values in the company's capital structure.
• WACC is most useful when the company's current financing structure is reasonably representative of its expected future capital structure.

Step 1 — Calculate the Cost of Equity

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
Cost of Equity = 4.7% + 1.17 × 5.0% = 10.5%

The first component of WACC is the Cost of Equity, which represents the return shareholders require for bearing the company's systematic market risk. This is estimated using CAPM. The risk-free rate represents the return available from a low-risk government bond, while beta scales the equity risk premium based on how sensitive the stock has historically been to movements in the overall market. For Apple, this produces a Cost of Equity of 10.5%.

Step 2 — Calculate the Cost of Debt

Pre-Tax Cost of Debt = Interest Expense / Total Debt
Interest expense unavailable → Default Cost of Debt = 4.0%
Tax Rate = Income Tax Expense / Income Before Tax
$27.0B / $155.9B = 17.3%
After-Tax Cost of Debt = Pre-Tax Cost of Debt × (1 − Tax Rate)
4.0% × (1 − 17.3%) = 3.3%

The second component of WACC is the Cost of Debt, which estimates the company's borrowing cost. Because reported Interest Expense is unavailable, the model uses a default Pre-Tax Cost of Debt of 4.0%. The effective Tax Rate is calculated from trailing twelve-month (TTM) Income Tax Expense and Income Before Tax. Interest expense is generally tax deductible, so the Pre-Tax Cost of Debt is adjusted for the tax benefit. For Apple, this results in an After-Tax Cost of Debt of 3.3%.

Step 3 — Determine Capital Structure

Total Capital = Market Value of Equity (Market Cap) + Total Debt
$4901.0B + $84.3B = $4985.4B
Equity Weight = Market Value of Equity / Total Capital
$4901.0B / $4985.4B = 98.3%
Debt Weight = Total Debt / Total Capital
$84.3B / $4985.4B = 1.7%

WACC weights equity and debt according to their relative contribution to the company's capital structure. Equity is measured using its current market value, while debt is represented by the company's total debt. For Apple, equity represents about 98% of total capital and debt represents about 2%. These weights determine how much the Cost of Equity and After-Tax Cost of Debt contribute to the final WACC.

Step 4 — Calculate WACC

WACC = Equity Weight × Cost of Equity + Debt Weight × After-Tax Cost of Debt
WACC = (98.3% × 10.5%) + (1.7% × 3.3%) = 10.4%

For Apple, the estimated WACC is 10.4%. The estimated WACC represents the blended annual return required by both shareholders and lenders. It is commonly used as the discount rate when valuing future business cash flows. Because Apple's capital structure is about 98% equity and 2% debt, the WACC is mainly influenced by the Cost of Equity.