🔄cost-of-capital
WACC vs CAPM
WACC vs CAPM
WACC is a blended firm-wide discount rate. CAPM estimates the cost of equity, which is one input to WACC.
Comparison Table
| Feature | WACC | CAPM |
|---|---|---|
| Purpose | Firm-wide discount rate | Cost of equity estimation |
| Inputs | Cost of debt, cost of equity, weights, tax rate | Risk-free rate, beta, market premium |
| Scope | Entire capital structure | Equity only |
| When to use | Discounting firm-level cash flows (FCFF) | Finding Re for WACC or equity valuation |
Key Differences
- →CAPM feeds into WACC as the cost of equity component
- →WACC blends debt and equity; CAPM is equity-only
- →WACC can be used as a project discount rate; CAPM cannot directly
When to Use WACC
- ✓Discounting FCFF in DCF valuation
- ✓Evaluating projects at the firm level
- ✓Capital budgeting decisions
When to Use CAPM
- ✓Estimating cost of equity
- ✓Plotting on the Security Market Line
- ✓Evaluating individual stock required returns
Common Confusions
- !Using CAPM as a discount rate for entire firm cash flows
- !Thinking WACC replaces CAPM (CAPM is an input to WACC)
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FAQs
Common questions about this comparison
Only if you are discounting equity cash flows (FCFE). For firm cash flows, use WACC.