In business valuation analysis, the Weighted Average Cost of Capital (WACC) is the discount rate which business valuators apply to convert future economic earning (cash flows) to the present value. It involves the assignment of weights to equity and debt, based on the capital structure of the business entity, for the determination of the cost of all financing sources in the business enterprise's capital mix. The WACC is most applicable in the use of the discounted cash flow method of business valuation. When the WACC is applied to convert future cash flows to the present, the result is the fair market value of the business entity. The WACC is computed as the cost of debt plus the cost of equity where the cost of equity is computed as follows:

Cost of Equity = R_f + b_x(MRP)

Where:

R_f  = Risk-Free Rate

b_x  = Beta

(MRP) = Market Risk Premium

                         b_x(MRP) = Equity Risk Premium