WACC, CAPM

💰 WACC, CAPM & the Cost of Capital Dance 💃📈

Ever feel like financial models speak their own language? Let’s decode one of finance’s most essential relationships — the one between WACC and CAPM.

Spoiler: it’s not just alphabet soup. 🍜

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🧠 First, What Are They?

🔹 CAPM (Capital Asset Pricing Model)
This classic model helps estimate the cost of equity — the return investors expect for taking on the risk of owning your stock.

CAPM Formula:
Re = Rf + β × (Rm – Rf)
(Where Re is cost of equity, Rf is risk-free rate, β is beta, and Rm – Rf is the equity risk premium)

🔹 WACC (Weighted Average Cost of Capital)
Your company’s blended cost of capital — combining the cost of equity (via CAPM) and the cost of debt (adjusted for taxes).

WACC Formula:
WACC = (E/V × Re) + (D/V × Rd × (1 – Tc))
(E = equity, D = debt, V = total value, Re = cost of equity from CAPM, Rd = cost of debt, Tc = corporate tax rate)

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🔗 So How Are They Related?

➡️ CAPM feeds WACC.
CAPM gives us the cost of equity, which plugs directly into the WACC formula.

➡️ WACC drives valuation.
WACC becomes your discount rate in DCF models — influencing how much a company or project is worth today.

➡️ Think of CAPM as the ingredient and WACC as the recipe — one gives you a flavor (equity risk), the other bakes it into a valuation cake. 🎂

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🎯 Why It Matters

• Investors use CAPM to measure risk-adjusted returns

• Companies use WACC to decide if an investment creates value

• You? You use both to speak the language of value creation

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💡 Finance isn’t about formulas — it’s about telling the story of risk, return, and capital decisions. And these two models? They’re the storytellers.

#WACC #CAPM #FinanceSimplified #CostOfCapital #CorporateFinance #Valuation #InvestmentAnalysis