Weighted Average Cost Of Capital (Wacc) Definition
The weighted average cost of capital, or WACC, is the minimum return that a company must earn on its investment to satisfy its creditors and shareholders. The WACC is calculated by weighting each source of funding by its respective cost and then adding them together.
A company’s WACC will change as the mix of its financing changes. For example, if a company takes on more debt, its WACC will increase because debt typically has a higher interest rate than equity. Conversely, if a company repurchases shares or pays dividends, its WACC will decrease because equity typically has a lower cost than debt.
The weighted average cost of capital is important for companies to understand because it represents the true cost of funds that must be earned in order to meet the expectations of all investors. It is also used by financial analysts to compare the relative costs of different sources of funding and to assess a company’s financial health.
