Introduction
The Weighted Average Cost of Capital (WACC) is a key metric used to calculate the Cost of Capital, often applied in Discounted Cash Flow (DCF) analysis to determine a company’s valuation.
WACC calculates the cost of capital by weighting different components such as Debt and Equity according to their proportion in the company’s capital structure. The result is an average rate that reflects the cost of financing the business, based on both market conditions and company-specific risks.
What is the Cost of Capital Screen?
The Cost of Capital screen in Valutico is a dedicated interface that gives users full transparency and control over the components of WACC. This screen plays a crucial role in enabling accurate and customizable valuations, allowing users to adjust inputs based on the unique characteristics of the company and prevailing market conditions.
Key Features
WACC Tree Display:
A visual representation of all essential components, including:
Risk-Free Rate
Levered Beta
Market Risk Premium
Cost of Equity Premium
Cost of Debt
This structured layout helps you understand how each element contributes to the overall WACC.
Editable Inputs with Auto-Adjustments:
Key fields such as Debt-to-Equity Ratio, Credit Spread, and Unlevered Beta can be manually adjusted. The system ensures that changes in one input will automatically update dependent parameters, maintaining consistency across the model.
Qualitative Integration:
The Cost of Equity Premium can be dynamically influenced by insights from the Qualitative Assessment module, accounting for non-financial factors such as management quality and business maturity.
Editable vs. Read-Only Fields:
Some inputs are editable based on your user permissions and valuation context, while others remain read-only to protect data integrity
How to Use the Cost of Capital Feature
You must be within a valuation flow to access the Cost of Capital step.
Navigate to the Cost of Capital Step
Open a valuation in your workspace.
Proceed through the valuation process until you reach the Cost of Capital step.
Explore the WACC Tree and Clickable Fields
Once in the Cost of Capital screen, you’ll see a WACC tree diagram that visualises each component.
The first highlighted field is typically Unlevered Beta.
You can click on other fields (e.g., Risk Premium, Tax Rate) to view and adjust detailed inputs.
For most fields, you can select your data source:
Peer group median
Industry median
Manual entry
When a source is selected, its corresponding value will be shown and can be edited as needed.
Adjust Median Values
In the bottom-left panel, you'll see selectable median values.
Click a median value to activate it.
Update the selected value manually as needed (highlighted in green when active).
Optionally, add a rationale for your change to keep a clear audit trail of your decision-making.
Best Practices
Always review changes before clicking Apply to avoid unintended updates.
Use the Qualitative Assessment module to inform decisions around risk-based components.
When making manual adjustments, consider adding a rationale to help colleagues understand your assumptions.
📚 Explore our in-depth Cost of Capital White Paper to learn more.