Weighted Average Cost of Capital (WACC)

Here are some notes on Weighted Average Cost of Capital (WACC) in detail:

  • Weighted Average Cost of Capital (WACC) is the minimum return that a company must earn on its investments in order to satisfy its investors. It is calculated by weighting the cost of debt and equity, based on the proportion of each in the company’s capital structure.
  • The WACC is an important metric for companies because it helps them to determine the cost of capital for new projects. The WACC is also used to calculate the value of a company.
  • The WACC is calculated as follows:
WACC = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity)
  • The weight of debt is the proportion of debt in the company’s capital structure.
  • The cost of debt is the interest rate that the company pays on its debt.
  • The weight of equity is the proportion of equity in the company’s capital structure.
  • The cost of equity is the return that investors expect to earn on their investment in the company’s stock.
  • The WACC can be used to calculate the value of a company by discounting the company’s future cash flows using the WACC.
  • The WACC can also be used to determine the cost of capital for new projects by multiplying the WACC by the risk of the project.

Here are some of the additional things to keep in mind about WACC:

  • The WACC is a dynamic measure, meaning that it can change over time as the cost of debt and equity changes.
  • The WACC is a theoretical measure, meaning that it is not always an accurate reflection of the actual cost of capital for a company.
  • The WACC is a useful tool, but it should not be used as the sole factor in making investment decisions.