Updated on January 27, 2024Table of Contents
The weighted average cost of capital (WACC) is a measure of the cost of capital for a company. It is calculated by taking the weighted average of the cost of each type of capital that the company uses.
WACC = (E/V)rE + (D/V)rD
What does WACC tell you?
WACC represents the minimum return a company needs to generate to satisfy its investors, both debt holders and equity holders. It reflects the cost of financing the company’s operations and is used to evaluate investment decisions.
Is a higher or lower WACC better?
A lower WACC is generally better because it means the company can fund its operations at a lower cost, which can increase profitability. A higher WACC indicates higher risk or more expensive financing.
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