The model adds an equity premium to a risk-free return to compensate investors for the risk. Shareholders calculate the cost of their equity by using the Capital Asset Pricing Model (CAPM). The WACC represents the opportunity cost of capital to invest in assets or companies at similar risk at market terms and reflects the required return to compensate capital providers such as shareholders and creditors. The WACC will then calculate the weighted average of the cost of capital. The Weighted Average Cost of Capital (WACC) is a method to estimate the Discount Rate (or its cost of capital) for an asset or a company by analyzing the target financing structure of equity and debt and their cost of capital.
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