The Analyst’s Course · Valuation & DCF
WACC, Disassembled
Cost of equity: CAPM
Cost of equity = risk-free rate + β × equity risk premium. The risk-free rate is the 10-year Treasury (what you earn with zero credit risk). Beta measures how much this stock tends to move with the market — it scales the premium. The ERP is what equities must pay above bonds to attract capital: historically ~4.5–6%, with Damodaran's implied-ERP estimates running ~4–5% in recent years versus higher historical averages. Multiply through: AAPL at β≈1.2, rf 4.2%, ERP 4.5% → 4.2 + 1.2×4.5 = 9.6%.
Cost of debt and the blend
Debt is cheaper: interest is tax-deductible, so the after-tax cost of debt is rate × (1 − tax). WACC weights each by its share of capital: WACC = (E/V)·Re + (D/V)·Rd·(1−t). Two practical disputes: market vs target weights (use market today, sanity-check against target), and whether beta needs deleveraging/relevering when comparing across structures. The panel defaults to a beta-scaled debt weight — override it in the sliders when you know the real structure.
2022: the denominator shock
From January to October 2022 the 10-year Treasury rose from ~1.5% to ~4.2%. For a long-duration growth stock, that 2.7pp move in rf — plus a widening ERP — could lift WACC from ~7% to ~10%. Re-discount the same cash flows: a cash flow 15 years out loses roughly (1.07/1.10)¹⁵ ≈ 35% of its present value. Total-value declines of 30–50% followed for the longest-duration cohort. Nothing in those companies' five-year plans changed; the denominator repriced them. This is lesson 1's duration math made national news.
WACC = (E/V)·Re + (D/V)·Rd·(1−t), Re = rf + β·ERP
WACC — The panel derives each piece live: 10Y from Treasury data, beta from the profile, ERP as your assumption.
The 2022 drawdown, in one equation
Nasdaq −33% in 2022 with earnings estimates roughly flat: the drawdown was almost purely denominator. Long-duration names (profitless software, unprofitable e-commerce) fell 60–80%; cash-rich, buyback-heavy compounders fell 10–25%. Same rate, same year — duration determined damage. The valuation panel's sensitivity grid makes this explicit: read down a column (same growth, rising WACC) and you are replaying 2022 cell by cell.
What you'll practise
CAPM with rf 4.2%, β 1.2, ERP 4.5% gives a cost of equity of…
3 graded checkpoints · certification exam at the end of the track
Sources
Damodaran (ERP data); Mauboussin, ATKM; McKinsey Valuation; IPO prospectuses (SEC S-1 filings)
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.