WACC (Weighted Average Cost of Capital)

The Weighted Average Cost of Capital (WACC) is a calculation used by businesses to evaluate their procurement options. It is defined as the rate of return that a business must earn on its financial investments to compensate for the risk taken in procuring those assets. The WACC takes into account the total cost of equity and debt financing, weighted according to their respective proportions in an organization’s capital structure. By recognizing the relative costs of different sources of capital, the WACC provides businesses with an estimate of their overall cost of capital needed to fund their operations.