What Is WACC? (interview questions and answer)

Free sample from the Deskcraft question bank

WACC is the DCF discount rate and a staple of investment banking interviews. This guide walks the calculation — cost of equity (CAPM), cost of debt and weights — with real questions from the Deskcraft bank and model answers.

1. How do you estimate a company's cost of debt?

Model answer

Use the yield to maturity on its traded debt, or the current market yield for its credit rating and tenor (risk-free plus a credit spread), not the historical coupon. Then apply the tax shield, so the after-tax cost of debt equals the pre-tax cost times one minus the tax rate.

2. What is WACC and what is the formula?

Model answer

It is the blended required return of all capital providers: WACC equals equity weight times cost of equity plus debt weight times after-tax cost of debt. It is the discount rate for unlevered free cash flow because those cash flows go to both debt and equity holders, and the weights use market values at a target capital structure.

3. How do you get from enterprise value to equity value per share in a DCF?

Model answer

Subtract net debt, plus any preferred stock and minority interest, from enterprise value to reach equity value, then divide by the fully diluted shares outstanding to get value per share.

4. If a company is entirely equity-financed, what is its WACC?

Model answer

Simply its cost of equity, because there is no debt weight. With no leverage the unlevered cost of equity equals WACC.