Weighted Average Cost of Capital (WACC)
Definition
The average rate a business pays to finance its assets, weighting the cost of equity and the cost of debt by their share of total capital. It is the common benchmark return used to evaluate investments.
Related Terms in Financial Analysis
Cost of Equity
The return shareholders require for investing in a business, reflecting its risk. It is a key input to WACC and to valuing a company's equity.
Cost of Debt
The effective interest rate a business pays on its borrowings, usually considered after tax because interest is generally tax-deductible. It feeds into the weighted average cost of capital.
Discounted Cash Flow (DCF)
A valuation method that estimates the value of an asset or business as the present value of its expected future cash flows, discounted at a rate reflecting their risk and the time value of money.
Terminal Value
In a discounted cash flow valuation, the estimated value of all cash flows beyond the explicit forecast period, capturing the long-run value of a business as a going concern.
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