Weighted Average Cost of Capital (WACC) is a financial metric used to evaluate the cost of financing a company’s operations. It represents the average rate of return a company needs to generate to satisfy its various sources of financing, including equity and debt.
WACC considers the proportion of each source of capital in the company’s overall capital structure and calculates a weighted average based on the respective costs of each source. Equity and debt have different costs associated with them, reflecting the risk and return expectations of investors and lenders. By combining these costs proportionally, WACC provides a single rate that represents the overall cost of capital for the company. WACC is frequently used in investment analysis, capital budgeting, and determining the required rate of return for evaluating potential projects or investments.
