🔄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)
FAQs
Common questions about this comparison
Only if you are discounting equity cash flows (FCFE). For firm cash flows, use WACC.