A discount rate calculated with the weighted average cost of capital (WACC) is a calculation that determines a firm’s cost of capital. In other words, it gauges the return that investors could reasonably expect from investing in your company. For example, a company with a WACC of 10% would need to generate a return of at least 10% in order to satisfy its investors.
Calculating discount rate with WACC is crucial for determining a company’s cost of capital, making it an important metric for evaluating investment decisions and setting capital structures. Over time, the development of more sophisticated financial models has led to greater accuracy in calculating WACC, making it a more reliable tool for investors.