WACC must use nominal rates of return built up from real rates and expected inflation, because the expected UFCFs are expressed in nominal terms.
WACC must be computed after corporate taxes, since UFCFs are computed after-tax.WACC must comprise a weighted-average of the marginal costs of all sources of capital (debt, equity, etc.) since UFCF represents cash available to all providers of capital.The following are important considerations when calculating WACC: While choosing the discount rate is a matter of judgment, it is common practice to use the weighted-average cost of capital (WACC) as a starting point. In situations where projections are judged to be aggressive, it may be appropriate to use a higher discount rate than if the projections are deemed to be more reasonable. While a separate discount rate can be developed for each projection interval to reflect the changing capital structure, the discount rate is usually assumed to remain constant throughout the projection period.
The discount rate is a weighted-average of the returns expected by the different classes of capital providers (holders of different types of equity and debt), and must reflect the long-term targeted capital structure as opposed to the current capital structure.
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The rate used to discount future unlevered free cash flows (UFCFs) and the terminal value (TV) to their present values should reflect the blended after-tax returns expected by the various providers of capital.
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