Weighted Average Cost of Capital (WACC)
Definition
The blended cost of a firm's debt and equity, weighted by their market values.
How It Works
Multiply each source's cost by its proportion of total capital. Tax-adjust the cost of debt. The result is the minimum return the firm must earn.
Formula
WACC = (E/V)×Re + (D/V)×Rd×(1-T)
Example
60% equity at 12% and 40% debt at 6% after-tax yields WACC = 9.0%.
Common Misconceptions
- ✗WACC uses book-value weights
- ✗You do not need to tax-adjust debt
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Common questions about Weighted Average Cost of Capital (WACC)
Only if the project has similar risk to the firm overall. Riskier projects need a higher rate.
WACC is the blended opportunity cost of all capital providers. If the firm cannot earn at least this rate on new investments, it is better off returning cash to investors rather than investing in projects.