Corporate FinanceFinancial Glossary
WACC (Weighted Average Cost of Capital)
Definition
The blended cost of a company's financing, weighted by the proportion of debt and equity in its capital structure. WACC = (E/V x Re) + (D/V x Rd x (1-T)), where E is equity value, D is debt value, V is total value, Re is cost of equity, Rd is cost of debt, and T is the corporate tax rate.
Why It Matters
WACC is the discount rate used in DCF valuations and capital budgeting decisions. A project must generate returns above the company's WACC to create shareholder value. Understanding WACC helps investors assess whether a company's growth is actually creating value or merely earning below its cost of capital.