To calculate my weighted average cost of capital or WACC, I have to ask myself how the company is funded, what proportion of the company is funded with debt and what proportion is funded with equity. Let's say my company is 50% funded with debts and 50% funded with equity. The next question I have to ask myself is, what interest do I pay on my debt? What is my cost of debt? Let's say it's 5%.

Also, how much return do my equity holders require? What's my cost of equity? Well, let's say that's 10%, so hang on half my funding costs me 5%, the debt, half my funding costs me 10% the equity. What's the average of all of these? Well, if I take my cost of debt times by the proportion, take my cost of equity times by the proportion, add them together i.e. half my funding cost me 5%, half my funding cost me 10%, I'll get to my WACC or weighted average cost of capital of 7.5%. Now, there are quite a lot of calculations that need to go into each of those. Your cost of debt and equity, your proportion of debt and equity and the valuation that you eventually get to at the end of a discounted cash flow is very sensitive to the WACC and each of those component parts, your cost of debt and especially your cost of are difficult to accurately calculate. So we have to make assumptions and change in those assumptions can quite dramatically change the eventual valuation your DCF gives.