Learnings · Valuation
WACC
and CAPM
The rate a DCF discounts at. The cost of equity from today’s 10-year government bond yield and each company’s own beta, the cost of debt from its accounts, and the equity risk premium left for you to set.
The question
How do you work out a company’s cost of capital?
The answer in sixty seconds
WACC, the weighted average cost of capital, is the return lenders and shareholders together require, weighted by how much of each the company uses, at market values. The cost of debt is what it pays to borrow, taken after tax because interest is deductible. The cost of equity comes from CAPM: the risk-free rate plus beta times the equity risk premium.
In India the risk-free rate is usually the 10-year government bond yield: it is in rupees, and the government is the safest rupee borrower. Beta measures how much the stock moves with the market; above 1 it swings more than the Nifty, below 1 less. The equity risk premium is the extra return investors want for holding shares rather than bonds. It is an estimate, not a price you can look up, so say which one you used.
Cost of equity Ke = Rf + β × ERP WACC = E ÷ (D + E) × Ke + D ÷ (D + E) × Kd × (1 − t) E, D market value of equity and of debt Kd pre-tax cost of debt t tax rate
Worked on live numbers
Today’s 10-year yield, company by company
Risk-free rate: 7.47% (India 10-year yield, 23 Oct 2026, CCIL). Each beta is measured from two years of weekly closes against the Nifty 50.
The equity risk premium is the extra return investors want for owning shares rather than government bonds. It cannot be looked up like a price: it is estimated, and estimates for India differ by method and date. The slider starts at 6%, a round number to move, not an estimate. Aswath Damodaran publishes country estimates each January (his country risk table).
| Per cent | Tata Consultancy Services | UltraTech Cement | Bharti Airtel |
|---|---|---|---|
| Risk-free rate | 7.47% | 7.47% | 7.47% |
| Beta against the Nifty 50 | 0.94 | 1.19 | 0.89 |
| Equity risk premium (your input) | 6.0% | 6.0% | 6.0% |
| Cost of equity | 13.10% | 14.61% | 12.81% |
| Cost of debt, before tax | 10.87% | 7.62% | 9.13% |
| Tax rate (tax ÷ pre-tax profit) | 24.5% | 25.1% | 25.1% |
| Cost of debt, after tax | 8.21% | 5.71% | 6.84% |
| Weight of equity (market value) | 98.8% | 93.2% | 85.8% |
| Weight of debt | 1.2% | 6.8% | 14.2% |
| WACC | 13.04% | 14.01% | 11.96% |
Statements: consolidated, for the year to 31 Mar 2026, as Yahoo Finance carries them, in Rs crore. Prices and market caps: NSE closes of 23 Oct 2026 via Yahoo Finance. Balance-sheet figures are at the year end while the market cap is today's, the usual mismatch in any quick EV.
Betas: Tata Consultancy Services 0.94 over 107 weeks to 23 Oct 2026; UltraTech Cement 1.19 over 107 weeks to 23 Oct 2026; Bharti Airtel 0.89 over 107 weeks to 23 Oct 2026; weekly simple returns, covariance over variance. The cost of debt is the year’s interest over year-end debt, leases included, so it is rough. Market cap is the equity weight; debt is at book value, as is usual when it does not trade.
Follow-ups
What they ask next
Why is the cost of equity higher than the cost of debt?
Shareholders are paid last, after lenders, and get no fixed return, so they carry more risk and want more. Debt is also cheaper after tax, because interest is deductible.
A company takes on more debt. What happens to its WACC?
At first it tends to fall, because more of the funding is the cheaper, tax-deductible kind. Push further and both the cost of debt and the cost of equity rise with the risk of distress, and WACC climbs again.
Why use market values for the weights, not book values?
WACC is what investors want on what their stakes are worth today. Book equity can be far from market value, especially for a company with a high P/B.
How would you get a beta for an unlisted company?
Take listed peers’ betas, strip out each one’s debt (unlevered beta = levered beta ÷ (1 + (1 − t) × D/E)), average them, then add back your company’s target debt to equity.
Why the 10-year yield and not a Treasury bill?
The rate should match how long the cash flows last. A business is valued over many years, so a long bond fits better than a 91-day bill.
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