> ## Documentation Index
> Fetch the complete documentation index at: https://valuation-101.com/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# Cost of Capital

> Compute the Weighted Average Cost of Capital (WACC) using Damodaran's three methods.

## What it does

Computes WACC using three independent methods, mirroring the Cost of Capital worksheet in Damodaran's fcffsimpleginzu spreadsheet.

## Method 1: Detailed (bottom-up)

Builds WACC from first principles in 5 stages:

### Stage 1: Beta

Start with an **unlevered beta** from Damodaran's industry averages, then re-lever for the company's capital structure:

```
β(levered) = β(unlevered) × [1 + (1 − t) × (D/E)]
```

### Stage 2: Cost of Equity (CAPM)

```
Cost of Equity = Risk-free rate + β × ERP
```

Four ERP sources available: manual input, country of incorporation, operating regions, or implied.

### Stage 3: Cost of Debt

Uses a **synthetic rating** based on interest coverage ratio (ICR):

```
ICR = EBIT / Interest Expense → Rating → Default Spread → Cost of Debt
```

The synthetic rating table maps ICR ranges to bond ratings and corresponding default spreads.

### Stage 4: Capital Structure

Market-value weights:

* Equity = shares × current price
* Debt = book value of debt (approximation for market value)

### Stage 5: WACC

```
WACC = (E / (E+D)) × r(e) + (D / (E+D)) × r(d) × (1 − t)
```

## Method 2: Industry Average

Looks up the company's industry in Damodaran's dataset and returns the industry average cost of capital directly.

## Method 3: Distribution

Shows where the company's WACC falls on the industry-wide distribution (percentile ranking). Useful for sanity-checking the detailed estimate.