Definition
Weighted Average Cost of Capital (WACC)
WACC is the average rate a company must pay to finance its operations, blending the cost of equity and the cost of debt.
WACC weights the cost of equity (return shareholders expect) and the after-tax cost of debt by their proportions in the capital structure. It represents the minimum return a company must earn on its projects to create value, the hurdle rate.
WACC is the discount rate used in DCF valuation: future cash flows are discounted at WACC to find intrinsic value. A company earning returns (like ROCE) above its WACC creates shareholder value; one earning below destroys it.
Related terms
- Return on Capital Employed (ROCE)ROCE measures operating profit relative to all capital used, both equity and debt, showing how efficiently a company generates returns from its total funding.
- Debt-to-Equity RatioThe debt-to-equity ratio compares a company's total borrowings to its shareholders' equity, gauging how leveraged (and risky) its balance sheet is.
- Discounted Cash Flow (DCF)DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.