Which WACC is “right”?

None exactly. A range makes sense, plus the question at which WACC the price would be justified.

Why does a pharma group have a lower WACC than a tech group?

Because its business moves less with the overall market, i.e. it has a lower beta.

What happens when interest rates rise?

The risk-free rate rises, so Ke and WACC rise, and fair value falls. This hits companies with cash flows far in the future the hardest.

Knowledge · Cost of capital

WACC (cost of capital) explained simply

WACC (weighted average cost of capital) is the average rate a company pays for equity and debt. In a DCF it serves as the discount rate: the higher it is, the less future cash flows are worth today.

At a glance

Two building blocks: cost of equity (what shareholders expect) and cost of debt (interest on borrowings).
Cost of equity via CAPM: risk-free rate + beta × market risk premium.
Beta measures how strongly the stock moves relative to the overall market. Beta 1 = like the market.
Debt is cheaper because interest is tax-deductible. More debt lowers the blended rate arithmetically but raises risk.
WACC is an assumption, not a measurement. That is why we show it openly and let you change it in the calculator.

Formulas

Cost of equity (Ke) = risk-free rate + beta × market risk premium
WACC = equity share × Ke + debt share × cost of debt × (1 − tax rate)

Worked example 1: cost of equity Merck & Co. (analysis Oct 2026)

Risk-free rate (yield on 10-year US Treasuries): 4.96%
Market risk premium: 4.46%
Beta: 0.60 (measured 0.22, raised for more realistic capital costs)
Ke = 4.96% + 0.60 × 4.46% = 4.96% + 2.68% = 7.64%
WACC in the analysis: 7.20% (debt lowers the blended rate)

Build-up of the cost of capital

Worked example 2: weighting (simplified, not a real Merck figure)

Assume 90% equity, 10% debt at 4.5% interest, 21% tax rate:

0.90 × 7.64% = 6.88%
0.10 × 4.5% × (1 − 0.21) = 0.36%
WACC = 6.88% + 0.36% ≈ 7.2%

What WACC does

The riskier, the higher the rate: Merck 7.20% (beta 0.60), Meta 9.86% (beta 1.19), Amazon 10.86% (beta 1.46).
Small change, big effect (Meta, simplified DCF): WACC 7.86% → $956, WACC 9.86% → $643, WACC 11.86% → $474. The share price is $642.62.
Even one point counts: For Meta a WACC of 8.86% changes the value to $772, at 10.86% to $547.
Thought the other way round: For Amazon the WACC would have to be about 7.0% (instead of 10.86%) for the FCF DCF to reach the share price.

WACC compared

Sensitivity of fair value to the WACC

Pitfalls

Beta fluctuates: Merck’s measured beta is 0.22. Taking it unchecked would make WACC unrealistically low and fair value too high.
The market risk premium is an assumption. Depending on the source it mostly lies between 4% and 6%.
The terminal value reacts most strongly, because in a DCF “WACC − perpetual growth” is in the denominator (see DCF valuation).

FAQ

Which WACC is “right”? None exactly. A range makes sense, plus the question at which WACC the price would be justified.
Why does a pharma group have a lower WACC than a tech group? Because its business moves less with the overall market, i.e. it has a lower beta.
What happens when interest rates rise? The risk-free rate rises, so Ke and WACC rise, and fair value falls. This hits companies with cash flows far in the future the hardest.