WACC
Weighted Average Cost of Capital ”” the average rate a company must earn to satisfy all capital providers.
Also: WACC · hurdle rate
Definition
Weighted Average Cost of Capital (WACC) is the average rate of return a company must generate to satisfy all its capital providers ”” debt holders and equity holders ”” weighted by the proportion of each in the capital structure. WACC = (E/V x Re) + (D/V x Rd x (1-Tc)), where E is equity value, D is debt value, V is total firm value, Re is cost of equity, Rd is cost of debt, and Tc is the tax rate. WACC is used as the discount rate in DCF analysis and represents the company's opportunity cost of capital.
Example
“A company with 60% equity (required return 12%) and 40% debt (interest 5%, tax rate 30%) has a WACC of 8.6%, meaning it must earn at least 8.6% to create shareholder value.”
Usage Examples
- 1
“The team applied wacc best practices to improve their corporate finance outcomes significantly.”
- 2
“Understanding wacc is essential for anyone building a career in Finance.”
When & How to Use
Use 'WACC' when working in Corporate Finance contexts where weighted average cost of capital (wacc) is the average rate of return a company must generate to satisfy all its capital providers ”” debt holders and equity holders ”” weighted by the proportion of each in the capital structure.
- ▸Applying wacc principles during a corporate finance project or initiative
- ▸Explaining wacc to a junior team member or stakeholder unfamiliar with Finance
- ▸Evaluating options or proposals using wacc as a decision-making criterion
Etymology & Origin
The term 'WACC' derives from professional usage and entered Finance professional usage as the field formalised in the 20th century.
History & Evolution
The concept of wacc has evolved alongside Finance. Early practitioners relied on informal methods; structured approaches emerged with the professionalisation of corporate finance in the mid-20th century. Today, wacc is a standard part of Finance practice globally.
Synonyms
- weighted average cost of capital
- blended cost of capital
- hurdle rate
Images
CC-licensed · free to useVideo
Related Terms
- dcf
- cost-of-equity
- cost-of-debt
- capital-structure