Weighted Average Cost of Capital (Discount Rate):0.00%
How to Calculate Discount Rate for Cash Flow
The discount rate is the rate of return used in a discounted cash flow (DCF) analysis to determine the present value of future cash flows. In corporate finance, the most common discount rate used is the Weighted Average Cost of Capital (WACC).
The WACC Formula
The WACC represents the average rate a company expects to pay to finance its assets. It is calculated as:
WACC = (E/V × Re) + (D/V × Rd × (1 – Tc))
E = Market Value of Equity
D = Market Value of Debt
V = Total Value (E + D)
Re = Cost of Equity
Rd = Cost of Debt
Tc = Corporate Tax Rate
Determining the Cost of Equity (CAPM)
The Cost of Equity (Re) is typically found using the Capital Asset Pricing Model (CAPM):
Re = Risk-free Rate + Beta × (Equity Risk Premium)
Practical Example
Imagine a company with $1,000,000 in equity and $500,000 in debt. If the risk-free rate is 4%, the beta is 1.2, and the market risk premium is 5.5%, the cost of equity is 10.6%. If the debt has a 6% interest rate and the tax rate is 21%, the after-tax cost of debt is 4.74%. When weighted, the final discount rate (WACC) would be approximately 8.65%.
function calculateDiscountRate() {
var rf = parseFloat(document.getElementById("riskFreeRate").value) / 100;
var beta = parseFloat(document.getElementById("beta").value);
var erp = parseFloat(document.getElementById("equityRiskPremium").value) / 100;
var rd = parseFloat(document.getElementById("costOfDebt").value) / 100;
var tax = parseFloat(document.getElementById("taxRate").value) / 100;
var equityVal = parseFloat(document.getElementById("marketEquity").value);
var debtVal = parseFloat(document.getElementById("marketDebt").value);
if (isNaN(rf) || isNaN(beta) || isNaN(erp) || isNaN(rd) || isNaN(tax) || isNaN(equityVal) || isNaN(debtVal)) {
alert("Please enter valid numeric values for all fields.");
return;
}
// 1. Cost of Equity (CAPM)
var costOfEquity = rf + (beta * erp);
// 2. After-tax Cost of Debt
var afterTaxDebt = rd * (1 – tax);
// 3. Weightings
var totalValue = equityVal + debtVal;
var weightEquity = equityVal / totalValue;
var weightDebt = debtVal / totalValue;
// 4. WACC
var wacc = (weightEquity * costOfEquity) + (weightDebt * afterTaxDebt);
// Display Results
document.getElementById("resEquityCost").innerText = (costOfEquity * 100).toFixed(2) + "%";
document.getElementById("resDebtCost").innerText = (afterTaxDebt * 100).toFixed(2) + "%";
document.getElementById("resEquityWeight").innerText = (weightEquity * 100).toFixed(2) + "%";
document.getElementById("resDebtWeight").innerText = (weightDebt * 100).toFixed(2) + "%";
document.getElementById("resWacc").innerText = (wacc * 100).toFixed(2) + "%";
document.getElementById("results").style.display = "block";
}