
6
Discounted cash flow valuation 77
Estimating the cost of capital – WACC
As mentioned earlier, the value of an enterprise according to the DCF
model is based on the sum of all future discounted free cash flows.
Consequently, the first thing we need to do is calculate the cost of capital
with which we will discount these cash flows. The
so-called discount rate should reflect the risk inher-
ent in the forecasted future cash flows. Various
methods of calculating a company’s cost of capi-
tal exist, but the weighted average cost of capital
(WACC) is the most used today. The WACC is cal-
culated using the following formula: ...