Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) represents a company’s average cost of capital from all sources — including debt, equity, and preferred stock — weighted by their respective proportions in the firm’s capital structure. It’s a crucial financial metric used by investors, analysts, and business owners to assess the minimum return a company must earn on its existing asset base to satisfy its investors and lenders.

WACC Formula:

WACC = (E/V × Re) + (D/V × Rd × (1 - Tc))

Where:

• E = Market value of equity

• D = Market value of debt

• V = E + D (total market value of the company’s financing)

• Re = Cost of equity

• Rd = Cost of debt

• Tc = Corporate tax rate

A lower WACC indicates cheaper capital, enabling a company to take on new projects more affordably. Conversely, a higher WACC reflects greater risk and cost associated with funding business activities. WACC is extensively used in business valuations, investment decisions, and capital budgeting processes.