WACC Weighted Average Cost of Capital Definition & Meaning | Financial Term | CSIMarket
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Glossary

WACC Weighted Average Cost of Capital

Financial Term

WACC (Weighted Average Cost of Capital) is a financial metric that is used to measure the cost of capital for a company. It is the rate of return that a company must generate to satisfy its investors and creditors, taking into account the capital structure of the company.

The concept of WACC is based on the assumption that a company*s value is determined by the total amount of capital invested in the company. The WACC calculation takes into account both equity and debt financing to determine the weighted average cost of capital for a company.

The formula used to calculate WACC is:

WACC = (E/V x Re) + [(D/V x Rd) x (1-T)]

Where:

E = Market value of equity
D = Market value of debt
V = Total capital invested (E+D)
Re = Cost of equity
Rd = Cost of debt
T = Tax rate

WACC plays a crucial role in the financial industry as it is used to assess the value of investment opportunities. Companies use the WACC formula to evaluate potential investments and decide whether they are worth pursuing. It is also used to determine the minimum rate of return that investors should expect from a company.

In addition to evaluating investment opportunities, WACC is also used to determine the value of a company. Investors often use WACC as a measure of a company*s profitability and sustainability. A low WACC indicates that a company has a lower cost of capital, which means it is more profitable and sustainable in the long run.

Overall, WACC is an important metric that is used extensively in the financial industry to evaluate investment opportunities and assess the value of companies.


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