The investment banking interview question we’re going to go over today is “What is WACC and how do you calculate it?” Here’s what you should say.
“WACC stands for Weighted Average Cost of Capital. It’s a quantitative measure of risk given the company’s business model and capital structure.
To calculate WACC, first we’d multiply Cost of Equity by the percentage of equity in the capital structure. Next, we would multiply the After-Tax Cost of Debt by the percentage of debt in the capital structure. Then we should add these two numbers up and that’ll give us WACC.”
There you have it. That’s how you can phrase your answer to this question: “What is WACC and how do you calculate it”. When it comes to describing what WACC is, we often hear people say that it’s a discount rate. However, that’s a very surface-level understanding. In an interview, you want to show that you understand the underlying concept. And saying that WACC measures risk demonstrates that.