WACC: Understanding Weighted Average Cost of Capital

Unlock the meaning of wacc: a comprehensive guide to weighted average cost of capital

What is WACC?

The Weighted Average Cost of Capital, commonly known as WACC, is a key financial metric used by companies to measure the cost of their capital. It is a calculation of a firm’s cost of capital, in which each category of capital is proportionately weighted. The categories of capital typically include common stock, preferred stock, bonds, and any other long-term debt.

Understanding the WACC Formula

The WACC formula is expressed as follows:

WACC = (E/V) * Re + (D/V) * Rd * (1 – Tc)

In this formula:

  • E represents the market value of the company’s equity
  • V is the total market value of equity and debt
  • Re is the cost of equity
  • D represents the market value of the company’s debt
  • Rd is the cost of debt
  • Tc is the corporate tax rate

The WACC formula essentially multiplies the cost of each capital component by its proportional weight and then sums the results.

Importance of the WACC Formula

The WACC formula plays a crucial role in financial valuation models. It is widely used in finance for various purposes, such as determining a company’s investment risks and the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital.

Investment Decisions

One of the primary uses of WACC is in making investment decisions. It serves as the discount rate in the Net Present Value (NPV) calculation, which helps in determining whether a proposed investment or project will yield profits in the future.

Project Appraisal

WACC is also used in project appraisal to determine the feasibility of a project. If the expected return on a project is higher than the WACC, the project is considered feasible as it is expected to generate more returns than the cost of capital.

Limitations of the WACC Formula

While the WACC formula is a valuable tool in financial decision making, it is not without its limitations. It assumes that the proportions of debt and equity, as well as the cost of debt and equity, remain constant, which is not always the case in real-world scenarios. Furthermore, it is based on after-tax costs, which may not be applicable in all situations.

Despite these limitations, the WACC formula remains a fundamental concept in corporate finance and investment analysis. It provides a useful starting point for understanding the cost of capital and its implications for investment decisions.


TradingChooser is the premier website for comparing the top online brokers. Developed by experts and trading enthusiasts, its primary objective is to provide traders with essential information regarding the most renowned online trading platforms.

Risk Disclaimer

Trading CFDs and forex involves highly speculative products that carry a significant risk of capital loss. Investments in financial products are susceptible to market risks. Certain financial instruments, including cryptocurrencies, are particularly speculative, and any investment should be made using funds designated as 'risk capital'. Previous market performance does not guarantee future outcomes.

Our stock market recommendations are sourced from what we consider reliable sources; however, we cannot guarantee their complete accuracy or truthfulness. They are provided solely for informational purposes and should not be construed as an invitation or solicitation to invest.

Advertiser Disclosure

TradingChooser provides global traders with a comprehensive platform to access in-depth information about various trading brokers. We meticulously examine company profiles and conduct daily investigations to identify potential frauds or scams in the industry. The trading brokers mentioned above undergo thorough verification and analysis by our team of experts, who consider the key features that a trading platform should possess.