Weighted Average Cost of Capital (WACC)
📘 What is WACC?
WACC (Weighted Average Cost of Capital) is the average rate of return a company is expected to pay to its security holders to finance its assets. It represents the company’s cost of capital from all sources, including debt and equity, weighted by their respective proportions in the company’s capital structure.
🧠 Formula Used
WACC = (E/V * Re) + (D/V * Rd * (1 – Tc))
- E = Market value of equity
- D = Market value of debt
- V = Total value (E + D)
- Re = Cost of equity
- Rd = Cost of debt
- Tc = Corporate tax rate
📈 Why is WACC Important?
- Used in financial modeling and DCF analysis to discount cash flows.
- Helps companies decide whether to pursue certain projects.
- Provides a benchmark for investment returns.
- Lower WACC indicates cheaper capital, enhancing shareholder value.
💡 When to Use
- Evaluating mergers, acquisitions, or capital budgeting decisions.
- Assessing the value of a firm or project.
- Benchmarking investment performance against cost of capital.