Glossary · Valuation

WACC (Weighted Average Cost of Capital)

WACC is the weighted average cost of capital: the blended rate of equity and debt used as the discount rate in DCF; typically 8-14% for Benelux SMEs.

Definition

WACC weights two components: the cost of equity (return required by shareholders, often via CAPM: risk-free + beta × market premium) and the cost of debt (effective after-tax rate), proportional to their share of the capital structure. For a business with 60% equity / 40% debt, equity cost 14%, after-tax debt cost 4%: WACC = 0.6×14% + 0.4×4% = 10%.

For Benelux SMEs typical ranges: stable service businesses 8-10%, manufacturing 9-11%, SaaS/scale-ups 12-15%, distressed or highly owner-dependent 15%+. Lower WACC = higher DCF value; that's why WACC discipline is critical: over-optimistic assumptions inflate value and buyers will pull them back without exception.

Formula

WACC = (E/V × Ke) + (D/V × Kd × (1 − Tc)) · where E = equity, D = debt, V = E+D, Ke = cost of equity, Kd = cost of debt, Tc = tax rate

Worked example

An Antwerp manufacturer: equity €4m, debt €2m, estimated cost of equity 13% (risk-free 3% + beta 1.2 × market premium 8.3%), debt rate 5%, tax rate 25%. WACC = (4/6 × 13%) + (2/6 × 5% × 0.75) = 8.67% + 1.25% = 9.92%. Compare with sector benchmark: industrial manufacturing 9-11%, so within band.

When it matters

In every DCF valuation. Beyond DCF: in investment decisions (which projects clear the hurdle rate), benchmarking actual loan costs vs market, and sanity-checking multiples (too-low WACC + high multiple = doubly optimistic).

Method: DCF: where WACC is applied

Frequently asked

What's a realistic WACC for my SME?: Range typically 8-14% depending on sector and risk profile. Below 8% is usually only defensible for very stable cash generators with strong market position. Above 14% signals significant business risk (owner dependency, customer concentration, distressed sector).
How do I estimate cost of equity without public comparables?: CAPM with estimated beta from sector averages (Damodaran tables give European sector betas). For very small SMEs add a "size premium" of 2-4% to discount for illiquidity. Uncertainty is large: always provide a sensitivity band.
Which tax rate do I use?: The marginal rate, not the average effective. In Belgium: 25% corporate tax (reduced rate 20% under conditions for first bracket). In the Netherlands: 25.8% above €200k profit, 19% below. For M&A use 25% as default unless you have explicit reason to deviate.

Related terms

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Paired valuation method

/en/waarderingsmethodes/dcf

Definition

Worked example

Frequently asked

What's a realistic WACC for my SME?

Range typically 8-14% depending on sector and risk profile. Below 8% is usually only defensible for very stable cash generators with strong market position. Above 14% signals significant business risk (owner dependency, customer concentration, distressed sector).

How do I estimate cost of equity without public comparables?

CAPM with estimated beta from sector averages (Damodaran tables give European sector betas). For very small SMEs add a "size premium" of 2-4% to discount for illiquidity. Uncertainty is large: always provide a sensitivity band.

Which tax rate do I use?

The marginal rate, not the average effective. In Belgium: 25% corporate tax (reduced rate 20% under conditions for first bracket). In the Netherlands: 25.8% above €200k profit, 19% below. For M&A use 25% as default unless you have explicit reason to deviate.