Cost of Capital by Industry: 2026 WACC, Discount Rate and Capitalization Rate by Sector
WACC, cost of equity, beta and debt ratios for 94 US sectors, the far higher rate a private business is actually discounted at, and the arithmetic that turns either one into a multiple. Then run your own numbers.
Estimated business value
Method breakdown
What moves this number
Estimate, not a certified appraisal. Your figures are not stored.
In short
Across 5,994 US listed companies in January 2026, the weighted average cost of capital was 6.96%, or 7.72% excluding financial firms, on a median sector WACC of 7.08% and a median cost of equity of 8.07%. Internet software carried the highest sector WACC at 10.66% and general utilities the lowest at 4.36%. Those figures describe public companies. A private business with an owner working in it is discounted at 18% to 25%, because a size premium of 3% to 7% and a company specific premium of 3% to 10% are added on top of the same risk-free rate and equity risk premium. That gap is not a rounding difference: it is the entire reason a public company trades near 20x EBITDA while a Main Street business sells near 2.7x SDE.
The market
What the cost of capital actually is in 2026
Four numbers describe the whole US market. Every sector row further down is a variation on them, and every private company discount rate is one of them with premiums stacked on top.
6.96%
Market WACC
Weighted average, 5,994 US firms
8.02%
Cost of equity
At the market beta of 0.91
3.97%
Cost of debt
After tax, most operating sectors
26.02%
Debt ratio
Debt as a share of total capital
Strip out banks, insurers and property trusts and the market runs a 7.72% WACC on an 8.37% cost of equity, which is the set to quote when you are benchmarking an operating company. Financial firms drag the market figure down because leverage is their product rather than a financing choice, and their 4.98% WACC says nothing about the risk of a manufacturer.
The dataset also lets you recover the two inputs behind every cost of equity in it. Solve the sector rows for the line that fits them and you get a risk-free rate of about 3.95% and an equity risk premium of about 4.46%, which puts the expected return on a beta of 1.0 at 8.41%. That last figure is worth holding on to: Damodaran separately published an expected return on US stocks of 8.41% on January 1, 2026, against an implied equity risk premium of 4.23% over the Treasury bond rate. The split between the two components differs slightly, the total does not.
The definitions
Cost of equity, cost of debt, WACC, discount rate and cap rate
These five get used interchangeably in conversation and they are not the same thing. Picking the wrong one is the most expensive arithmetic mistake in small company valuation, because the error compounds through every year of the forecast.
| Rate | What it is | How it is built | 2026 reference |
|---|---|---|---|
| Cost of equity | The return an equity investor requires | Risk-free rate plus beta times the equity risk premium, or a build-up for a private company | 8.07% median US sector |
| Cost of debt | What a lender charges, after tax | Pre-tax borrowing rate multiplied by one minus the marginal tax rate | 3.97% after tax, market |
| WACC | The blended cost of all capital | Cost of equity times the equity weight plus after-tax cost of debt times the debt weight | 6.96% US market |
| Discount rate | The rate applied to a forecast of future cash flow | Usually the WACC for cash flow to the firm, the cost of equity for cash flow to equity | 18% to 25% for a small business |
| Capitalization rate | The rate applied to a single year of cash flow | Discount rate minus the long term growth rate | Discount rate less 2% to 4% |
One rule keeps this straight. Discount cash flow to the firm, which is measured before interest, at the WACC. Discount cash flow to equity, which is measured after interest and debt repayment, at the cost of equity. Applying the WACC to an equity cash flow double counts the benefit of debt and overstates value in every leveraged sector on the table below.
The data
WACC by industry: cost of equity, cost of debt and capital structure
Levered beta, cost of equity, after-tax cost of debt, debt as a share of total capital, and the resulting weighted average cost of capital for every US sector Damodaran tracks, vintage January 2026, 5,994 firms. Sorted by WACC within each group, highest first. Read the beta column and the debt column together: two sectors can reach the same WACC from opposite directions.
Technology and software
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Software (internet) | 29 | 1.69 | 11.48% | 3.97% | 10.95% | 10.66% |
| Semiconductor | 66 | 1.52 | 10.72% | 3.97% | 2.53% | 10.55% |
| Semiconductor equipment | 31 | 1.40 | 10.18% | 3.97% | 4.64% | 9.89% |
| Computers and peripherals | 36 | 1.35 | 9.97% | 3.97% | 4.42% | 9.71% |
| Software (system and application) | 309 | 1.28 | 9.64% | 3.97% | 5.28% | 9.34% |
| Software (entertainment) | 77 | 1.03 | 8.54% | 3.97% | 2.00% | 8.44% |
| Office equipment and services | 14 | 1.33 | 9.90% | 3.80% | 32.48% | 7.92% |
| Electronics (general) | 114 | 0.97 | 8.28% | 3.97% | 9.92% | 7.85% |
| Computer services | 64 | 1.09 | 8.80% | 3.97% | 20.06% | 7.83% |
| Telecom equipment | 57 | 0.92 | 8.07% | 3.97% | 8.44% | 7.72% |
| Electronics (consumer and office) | 8 | 0.87 | 7.81% | 4.51% | 5.49% | 7.63% |
| Information services | 15 | 0.92 | 8.06% | 3.80% | 24.91% | 7.00% |
Healthcare and life sciences
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Drugs (biotechnology) | 496 | 1.14 | 9.01% | 4.51% | 11.54% | 8.49% |
| Healthcare information and technology | 115 | 1.11 | 8.89% | 3.97% | 13.60% | 8.22% |
| Drugs (pharmaceutical) | 228 | 0.98 | 8.33% | 4.51% | 12.69% | 7.85% |
| Healthcare products | 204 | 0.91 | 8.00% | 3.97% | 11.34% | 7.54% |
| Healthcare support services | 104 | 0.87 | 7.84% | 3.97% | 26.16% | 6.83% |
| Hospitals and healthcare facilities | 31 | 0.80 | 7.52% | 3.97% | 37.47% | 6.19% |
Financial services and real estate
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Real estate (operations and services) | 54 | 0.97 | 8.26% | 3.97% | 19.77% | 7.41% |
| Insurance (general) | 21 | 0.67 | 6.95% | 3.97% | 20.40% | 6.34% |
| Real estate (general and diversified) | 12 | 0.81 | 7.56% | 3.80% | 34.88% | 6.25% |
| Investments and asset management | 283 | 0.66 | 6.89% | 3.80% | 24.64% | 6.13% |
| Brokerage and investment banking | 32 | 1.17 | 9.17% | 3.80% | 57.55% | 6.08% |
| Real estate (development) | 14 | 0.84 | 7.71% | 3.97% | 50.45% | 5.82% |
| Insurance (property and casualty) | 57 | 0.48 | 6.11% | 3.55% | 12.91% | 5.78% |
| Reinsurance | 1 | 0.58 | 6.54% | 3.55% | 30.30% | 5.64% |
| Insurance (life) | 20 | 0.64 | 6.82% | 3.80% | 40.42% | 5.60% |
| Retail REITs | 26 | 0.62 | 6.72% | 3.55% | 36.07% | 5.57% |
| REITs (all) | 190 | 0.64 | 6.81% | 3.55% | 45.79% | 5.32% |
| Financial services (non-bank and insurance) | 176 | 0.97 | 8.27% | 3.80% | 73.13% | 5.00% |
| Bank (money center) | 15 | 0.76 | 7.34% | 3.55% | 62.15% | 4.98% |
| Banks (regional) | 568 | 0.40 | 5.73% | 3.55% | 34.25% | 4.98% |
Industrials and manufacturing
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Auto and truck | 33 | 1.46 | 10.45% | 3.97% | 16.45% | 9.38% |
| Electrical equipment | 112 | 1.25 | 9.53% | 4.51% | 10.72% | 8.99% |
| Engineering and construction | 48 | 1.21 | 9.35% | 3.97% | 12.29% | 8.69% |
| Construction supplies | 40 | 1.15 | 9.08% | 3.80% | 14.98% | 8.29% |
| Auto parts | 35 | 1.34 | 9.92% | 3.97% | 29.31% | 8.18% |
| Building materials | 41 | 1.11 | 8.91% | 3.80% | 20.63% | 7.85% |
| Steel | 19 | 1.06 | 8.69% | 3.80% | 19.04% | 7.76% |
| Machinery | 105 | 0.96 | 8.25% | 3.97% | 12.81% | 7.70% |
| Aerospace and defense | 79 | 0.95 | 8.17% | 3.97% | 13.47% | 7.60% |
| Paper and forest products | 6 | 0.96 | 8.22% | 3.97% | 30.40% | 6.93% |
| Packaging and container | 19 | 1.02 | 8.51% | 3.55% | 35.53% | 6.75% |
| Shipbuilding and marine | 8 | 0.75 | 7.31% | 3.97% | 18.40% | 6.69% |
| Rubber and tires | 3 | 0.53 | 6.31% | 3.97% | 78.19% | 4.48% |
Energy, utilities and materials
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Coal and related energy | 16 | 1.07 | 8.73% | 3.97% | 6.67% | 8.41% |
| Metals and mining | 73 | 1.04 | 8.60% | 4.51% | 9.90% | 8.20% |
| Precious metals | 56 | 0.84 | 7.68% | 4.51% | 6.79% | 7.47% |
| Chemical (specialty) | 59 | 0.97 | 8.28% | 3.80% | 23.01% | 7.25% |
| Oilfield services and equipment | 97 | 0.95 | 8.19% | 3.97% | 27.20% | 7.04% |
| Oil and gas (production and exploration) | 142 | 0.72 | 7.17% | 3.80% | 27.32% | 6.25% |
| Chemical (basic) | 29 | 1.01 | 8.46% | 3.97% | 49.84% | 6.22% |
| Green and renewable energy | 15 | 0.86 | 7.77% | 4.51% | 53.08% | 6.04% |
| Oil and gas distribution | 23 | 0.67 | 6.93% | 3.80% | 36.92% | 5.78% |
| Chemical (diversified) | 4 | 0.85 | 7.74% | 3.80% | 63.78% | 5.23% |
| Oil and gas (integrated) | 4 | 0.30 | 5.29% | 3.55% | 12.16% | 5.07% |
| Power | 46 | 0.48 | 6.10% | 3.55% | 42.58% | 5.01% |
| Utility (water) | 14 | 0.41 | 5.79% | 3.55% | 38.41% | 4.93% |
| Utility (general) | 14 | 0.24 | 5.02% | 3.55% | 44.90% | 4.36% |
Consumer and retail
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Retail (building supply) | 14 | 1.54 | 10.80% | 3.97% | 18.89% | 9.51% |
| Footwear | 11 | 1.02 | 8.49% | 3.97% | 10.67% | 8.01% |
| Retail (special lines) | 94 | 1.09 | 8.81% | 3.97% | 16.50% | 8.01% |
| Hotel and gaming | 63 | 1.08 | 8.77% | 3.80% | 28.44% | 7.36% |
| Homebuilding | 30 | 0.91 | 8.01% | 3.80% | 17.59% | 7.27% |
| Retail (general) | 23 | 0.81 | 7.54% | 3.80% | 7.36% | 7.27% |
| Farming and agriculture | 35 | 1.13 | 8.99% | 3.97% | 34.14% | 7.27% |
| Retail (grocery and food) | 15 | 1.12 | 8.94% | 3.97% | 34.19% | 7.24% |
| Retail (distributors) | 62 | 0.95 | 8.18% | 3.80% | 22.02% | 7.22% |
| Restaurant and dining | 64 | 0.92 | 8.07% | 3.80% | 21.40% | 7.16% |
| Entertainment | 92 | 0.83 | 7.63% | 3.97% | 13.73% | 7.13% |
| Apparel | 35 | 0.94 | 8.12% | 3.97% | 23.83% | 7.13% |
| Household products | 110 | 0.82 | 7.59% | 3.97% | 15.36% | 7.03% |
| Tobacco | 10 | 0.79 | 7.49% | 4.51% | 18.68% | 6.94% |
| Retail (automotive) | 34 | 0.94 | 8.12% | 3.80% | 31.20% | 6.78% |
| Recreation | 49 | 1.02 | 8.51% | 3.97% | 38.65% | 6.76% |
| Furniture and home furnishings | 27 | 0.82 | 7.62% | 3.97% | 29.74% | 6.53% |
| Food wholesalers | 13 | 0.87 | 7.82% | 3.80% | 31.96% | 6.53% |
| Beverage (alcoholic) | 14 | 0.81 | 7.57% | 3.97% | 30.24% | 6.48% |
| Beverage (soft) | 27 | 0.64 | 6.81% | 3.97% | 17.07% | 6.33% |
| Food processing | 78 | 0.61 | 6.66% | 3.80% | 30.43% | 5.79% |
Media, business services and transport
| Sector | Firms | Beta | Cost of equity | Cost of debt | Debt ratio | WACC |
|---|---|---|---|---|---|---|
| Advertising | 52 | 1.21 | 9.35% | 3.97% | 28.67% | 7.81% |
| Trucking | 26 | 1.01 | 8.46% | 3.80% | 20.15% | 7.52% |
| Environmental and waste services | 53 | 0.95 | 8.17% | 3.97% | 17.66% | 7.43% |
| Diversified | 20 | 0.88 | 7.88% | 3.55% | 13.46% | 7.30% |
| Transportation (railroads) | 4 | 0.98 | 8.30% | 3.55% | 21.75% | 7.27% |
| Business and consumer services | 155 | 0.89 | 7.91% | 3.80% | 16.47% | 7.23% |
| Education | 32 | 0.78 | 7.43% | 3.97% | 19.60% | 6.75% |
| Air transport | 23 | 1.19 | 9.24% | 3.97% | 47.69% | 6.72% |
| Transportation | 19 | 0.86 | 7.79% | 3.80% | 26.71% | 6.72% |
| Publishing and newspapers | 19 | 0.56 | 6.46% | 3.80% | 19.32% | 5.95% |
| Telecom (wireless) | 12 | 0.54 | 6.35% | 3.80% | 34.19% | 5.48% |
| Telecom services | 39 | 0.63 | 6.75% | 3.97% | 49.00% | 5.39% |
| Cable TV | 9 | 0.74 | 7.25% | 3.80% | 59.50% | 5.20% |
| Broadcasting | 24 | 0.47 | 6.05% | 3.97% | 46.19% | 5.09% |
Cost of debt is shown after tax, which is why it sits near 3.97% almost everywhere: the pre-tax borrowing rate is 5.29% for most operating sectors and the deduction takes roughly a quarter of it away. Sectors with heavy research spending, including biotechnology, pharmaceuticals, electrical equipment and precious metals, carry a higher 4.51% after-tax figure because they pay little cash tax and get less of a shield.
The extremes
Which industries have the highest and lowest cost of capital
Highest WACC
| Sector | Beta | Debt ratio | WACC |
|---|---|---|---|
| Software (internet) | 1.69 | 10.95% | 10.66% |
| Semiconductor | 1.52 | 2.53% | 10.55% |
| Semiconductor equipment | 1.40 | 4.64% | 9.89% |
| Computers and peripherals | 1.35 | 4.42% | 9.71% |
| Retail (building supply) | 1.54 | 18.89% | 9.51% |
| Auto and truck | 1.46 | 16.45% | 9.38% |
| Software (system and application) | 1.28 | 5.28% | 9.34% |
| Electrical equipment | 1.25 | 10.72% | 8.99% |
| Engineering and construction | 1.21 | 12.29% | 8.69% |
| Drugs (biotechnology) | 1.14 | 11.54% | 8.49% |
Lowest WACC
| Sector | Beta | Debt ratio | WACC |
|---|---|---|---|
| Utility (general) | 0.24 | 44.90% | 4.36% |
| Rubber and tires | 0.53 | 78.19% | 4.48% |
| Utility (water) | 0.41 | 38.41% | 4.93% |
| Banks (regional) | 0.40 | 34.25% | 4.98% |
| Bank (money center) | 0.76 | 62.15% | 4.98% |
| Financial services (non-bank) | 0.97 | 73.13% | 5.00% |
| Power | 0.48 | 42.58% | 5.01% |
| Oil and gas (integrated) | 0.30 | 12.16% | 5.07% |
| Broadcasting | 0.47 | 46.19% | 5.09% |
| Cable TV | 0.74 | 59.50% | 5.20% |
The two lists reach their positions differently. Technology sits at the top on pure equity risk: semiconductors fund 2.53% of capital with debt, so their 10.55% WACC is essentially their cost of equity with nothing to blend it down. At the bottom, general utilities earn a 4.36% WACC honestly, through a 0.24 beta on regulated revenue. Rubber and tires does not. Its 6.31% cost of equity is unremarkable, and the 4.48% WACC comes entirely from funding 78.19% of the capital base with debt. Leverage lowers the reported cost of capital and raises the risk of the equity underneath it, which is why a low WACC is only good news when the beta is low too.
Private companies
Why your business is discounted at 20% and not at 7%
Nothing on the table above applies directly to a company with one owner, four customers and a bookkeeper. Public sector rates are built from firms with diversified revenue, professional management, audited statements and access to public debt. A private business earns none of that, so appraisers abandon beta and build the rate up component by component instead. The ranges below are what practitioners defend in reports and in court, not a formula anyone can look up.
| Component | 2026 range | What it prices |
|---|---|---|
| Risk-free rate | 4.0% | The 20 year US Treasury bond yield on the valuation date. Not a judgment call, look it up. |
| Equity risk premium | 4.2% to 4.5% | What the broad US stock market is priced to return above Treasuries. Damodaran published an implied 4.23% on January 1, 2026. |
| Size premium | 3.0% to 7.0% | The extra return investors demand for small, undiversified, thinly financed companies. Appraisers commonly add 3% to 5%, and more than that below roughly $10M of revenue. |
| Industry risk premium | -2.0% to +3.0% | The sector adjustment. Utilities and grocery carry less operating risk than restaurants or construction, and the public beta table is the cleanest evidence for it. |
| Company specific risk | 3.0% to 10.0% | Customer concentration, owner dependency, thin management, a short lease, messy books, a single supplier. This is where most of the spread between two similar businesses comes from. |
| Total discount rate | 18% to 25% | Typical owner-operated business. Larger, professionally managed companies with clean records land at 12% to 18%. |
Two of those five lines are objective. The risk-free rate is a published Treasury yield and the equity risk premium is a market-wide estimate anyone can source. The other three are judgment, and the company specific premium is where two competent appraisers most often disagree by three or four points on the same set of books. Three points of discount rate on a business earning $400,000 is worth roughly $150,000 of value, which is why the narrative supporting that number matters more than the number itself.
Our calculation
What discount rate is hiding inside a 2.7x SDE multiple
Main Street businesses do not get sold on a discount rate. They get sold on a multiple of seller discretionary earnings, and the median US small business closed at 2.7x SDE in 2026. Those two worlds are the same arithmetic seen from different sides, and you can move between them. Take the SDE, subtract what it would cost to hire a manager to do the owner job, subtract maintenance capital spending, tax the remainder at 25%, and you have the net cash flow a buyer actually keeps. Divide it by the price and you have the capitalization rate the deal was struck at. Add long term growth and you have the discount rate.
| SDE | Multiple | Price | Manager salary | Capex | Net cash flow | Cap rate | Implied discount rate |
|---|---|---|---|---|---|---|---|
| $200,000 | 2.5x | $500,000 | $85,000 | $10,000 | $78,750 | 15.8% | 18.8% |
| $400,000 | 2.7x | $1,080,000 | $110,000 | $20,000 | $202,500 | 18.8% | 21.8% |
| $800,000 | 3.2x | $2,560,000 | $150,000 | $45,000 | $453,750 | 17.7% | 20.7% |
| $1,500,000 | 4.0x | $6,000,000 | $200,000 | $90,000 | $907,500 | 15.1% | 18.1% |
The implied discount rates land between 18.1% and 21.8%, at 3% assumed long term growth. That is the same band the appraisal literature quotes for closely held companies, arrived at from closed transaction prices rather than from a build-up. It is a useful cross-check in both directions. If your build-up produces 30% for a stable HVAC contractor, the market disagrees with you. If it produces 12%, so does the market.
The pattern in the middle column is worth noticing on its own. The implied rate is highest at $400,000 of SDE and falls at $1,500,000, even though the observed multiple rises from 2.7x to 4.0x. Larger businesses do not just sell for more turns, they carry a genuinely lower cost of capital, because the manager salary and the capex load stop consuming such a large share of the earnings. That is the mechanism behind the size premium, visible in transaction data rather than asserted from a study.
The conversion
Turning a discount rate into a valuation multiple
A capitalization rate and a multiple are the same statement written two ways. Subtract long term growth from the discount rate to get the capitalization rate, then divide one by it. A 20% discount rate with 3% growth is a 17% capitalization rate, which is a 5.88x multiple of that cash flow. Every cell below is one divided by the rate minus the growth.
| Discount rate | Multiple at 2% growth | Multiple at 3% growth | Multiple at 4% growth |
|---|---|---|---|
| 12% | 10.00x | 11.11x | 12.50x |
| 15% | 7.69x | 8.33x | 9.09x |
| 18% | 6.25x | 6.67x | 7.14x |
| 20% | 5.56x | 5.88x | 6.25x |
| 22% | 5.00x | 5.26x | 5.56x |
| 25% | 4.35x | 4.55x | 4.76x |
| 30% | 3.57x | 3.70x | 3.85x |
One caution before you use this on your own numbers. The multiples in the grid apply to net cash flow after a market rate owner salary, after tax and after maintenance capital spending. They are not SDE multiples and they are not EBITDA multiples, and they will look far too high if you apply them to either. For observed transaction multiples on the earnings measures buyers actually quote, use the SDE multiples by industry table for owner-operated businesses and the EBITDA multiples by industry table above roughly $1M of earnings.
The stakes
What one point of discount rate is worth
Getting the rate wrong costs very different amounts depending on where you start, and the direction surprises most people. The lower the rate, the more damage a small error does, because the denominator is small to begin with. At 3% growth:
| Starting rate | Multiple | Multiple one point higher | Value lost |
|---|---|---|---|
| 7% | 25.00x | 20.00x | 20.0% |
| 8% | 20.00x | 16.67x | 16.7% |
| 10% | 14.29x | 12.50x | 12.5% |
| 12% | 11.11x | 10.00x | 10.0% |
| 15% | 8.33x | 7.69x | 7.7% |
| 18% | 6.67x | 6.25x | 6.2% |
| 20% | 5.88x | 5.56x | 5.6% |
| 25% | 4.55x | 4.35x | 4.3% |
A listed utility discounted at 7% loses a fifth of its value if the rate moves one point. A Main Street business discounted at 20% loses 5.6%. This is the honest reason a discounted cash flow is a fragile tool for large stable companies and a surprisingly sturdy one for small businesses: at high discount rates the terminal value stops dominating and the answer stops swinging on assumptions nobody can defend. It is also why arguing over half a point of company specific risk on a $400,000 SDE business is usually not worth the meeting.
The inputs
What actually moves your cost of capital
For a private company the sector row is a starting point and the company specific premium does most of the work. These are the six factors that decide it, roughly in order of how much weight buyers and appraisers put on them.
Owner dependency
The largest single company-specific add-on in Main Street valuations. If the owner holds the customer relationships, the licenses and the pricing knowledge, a buyer is not acquiring a business, they are buying a job with goodwill attached. That is worth 2 to 5 points of discount rate on its own.
Customer concentration
One customer at 40% of revenue does not reduce this year cash flow at all, it reduces the probability that next year looks like this year. Appraisers price it in the discount rate rather than the earnings, which is why two businesses with identical EBITDA can be worth very different amounts.
Contract quality and recurrence
Recurring contract revenue cuts the volatility of the forecast, and volatility is exactly what the discount rate prices. A pest control route with annual agreements and 92% retention justifies a materially lower rate than a project contractor bidding every job.
Leverage and the cost of debt
The public table shows what leverage does to WACC. Rubber and tires funds 78.19% of capital with debt and lands at a 4.48% WACC on a 6.31% cost of equity. That is not a lower risk business, it is a cheaper capital stack, and it only works while the debt is available on those terms.
Financial record quality
Books that cannot be tied to tax returns push the rate up before anyone looks at the operations. A buyer who cannot verify earnings prices the uncertainty, and a quality of earnings finding late in diligence usually shows up as a lower multiple rather than a renegotiated forecast.
Growth durability, not growth rate
The capitalization rate subtracts long term growth, so growth you can sustain forever is worth a great deal and growth from one lucky year is worth nothing. Two points of defensible growth on a 20% discount rate raises the implied multiple from 5.00x to 5.56x.
The practical value of thinking in discount rates rather than multiples is that these are all fixable. You cannot argue your sector into a higher multiple. You can sign annual agreements, hire a second manager, break up a concentrated customer base and get the books to tie to the tax returns, and each of those genuinely lowers the rate a buyer applies. Our business value drivers breakdown covers what tends to move first.
The limit
Four ways an industry cost of capital gives you the wrong answer
Using a public WACC on a private company
The most common and most expensive error. Discounting a small contractor at the 8.69% engineering and construction WACC instead of a built-up 21% roughly triples the answer. The public row tells you about relative sector risk, not about the absolute rate your business gets.
Leverage read as low risk
Rubber and tires, chemical (diversified) at 63.78% debt and cable TV at 59.50% all show low WACCs built on borrowing rather than on stable cash flow. Copy the capital structure without the asset base behind it and you get the reported rate with none of the safety.
The sector that is not your sector
Business and consumer services covers 155 companies at a 7.23% WACC doing work that has almost nothing in common. Small firm counts are worse in the other direction: reinsurance is one company, oil and gas integrated is four, and neither row should be treated as a sector average at all.
A single date snapshot
Every figure here is priced off a January 2026 Treasury yield and a January 2026 equity risk premium. Rates move. If you are valuing something in six months, refresh the risk-free rate at least, because it flows through the cost of equity and the cost of debt at the same time.
Used properly, the sector table answers one question well: is my industry riskier or safer than the market, and by roughly how much. Take that relative signal, apply it to a build-up that starts from your own risk-free rate, and defend the company specific premium in words rather than in decimals. That is what a valuation report does, and it is why the narrative around the number carries more weight in a negotiation than the number does.
Questions
Cost of capital questions people actually ask
What is the average cost of capital by industry?
Across 5,994 US listed companies in January 2026 the market weighted average cost of capital was 6.96%, and 7.72% excluding financial firms. The median sector ran 7.08%. Internet software carried the highest WACC at 10.66% and general utilities the lowest at 4.36%. Private small businesses are not on this scale at all and are typically discounted at 18% to 25%.
What is a good WACC?
A good WACC is one below your sector row, because it means the market prices your cash flow as less risky than your peers. For US public companies the reference points are a 6.96% market average and a 7.08% median sector. Anything under 6% is utility or bank territory. Above 10% signals a high beta business such as semiconductors or internet software.
Which industry has the highest cost of capital?
Internet software led at 10.66% WACC in January 2026, followed by semiconductors at 10.55%, semiconductor equipment at 9.89% and computers and peripherals at 9.71%. All four combine high equity betas with almost no debt, so their WACC is essentially their cost of equity. Retail building supply at 9.51% is the highest outside technology.
Which industry has the lowest cost of capital?
General utilities at 4.36%, followed by rubber and tires at 4.48%, water utilities at 4.93% and both money center and regional banks at 4.98%. Regulated utilities earn the low rate through stable, rate-set cash flow and a 0.24 beta. Rubber and tires gets there differently, by funding 78.19% of its capital with debt.
How do you calculate the discount rate for a small business?
Use the build-up method. Start with the risk-free rate, about 4.0% in 2026, add an equity risk premium near 4.2%, add a size premium of 3% to 7%, add or subtract an industry adjustment, then add a company specific premium of 3% to 10% for owner dependency, customer concentration and record quality. Most owner-operated businesses land between 18% and 25%.
What is the difference between the discount rate and the capitalization rate?
The discount rate is applied to a multi-year forecast of cash flow. The capitalization rate is applied to a single normalized year, and it equals the discount rate minus the expected long term growth rate. A 22% discount rate with 3% sustainable growth gives a 19% capitalization rate, which is the same as a 5.26x multiple of that cash flow.
What discount rate should I use for a DCF?
Match the rate to the cash flow. Discount free cash flow to the firm, which is before interest, at the WACC. Discount free cash flow to equity, which is after interest and debt repayment, at the cost of equity. Mixing them is the most common DCF error, and it usually overstates value because WACC is lower than the cost of equity in every leveraged sector.
Why is the cost of capital for a small business so much higher than the industry average?
Because the published sector figures come from listed companies with diversified customers, professional management, audited statements and access to public debt markets. A private business with $400,000 of earnings has none of that. The size and company specific premiums that close the gap add 6 to 17 points, which is why a 7% public WACC and a 21% private discount rate can describe the same industry.
How does the cost of capital affect business valuation?
It sets the multiple. Value is cash flow divided by the capitalization rate, so the multiple is one divided by the discount rate minus growth. At a 20% discount rate and 3% growth that is 5.88x. At 18% it is 6.67x. One point of discount rate moves value 5.6% for a small business and 16.7% for a company discounted at 8%.
What is the equity risk premium in 2026?
Damodaran computed an implied equity risk premium of 4.23% over the US Treasury bond rate on January 1, 2026, against an expected return on US stocks of 8.41%. The January 2026 cost of capital dataset resolves to a slightly wider 4.46% premium on a 3.95% risk-free rate, which produces the same 8.41% expected return at a beta of 1.0.
See what rate your business is priced at
Enter revenue and earnings. You get a value range from three methods, including a discounted cash flow, benchmarked against comparable sales, with the risk factors that moved the number explained in plain English.
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Last updated August 2026