What is the weighted average cost of capital (WACC)?

The weighted average cost of capital, or WACC, is the average rate a company expects to pay to finance its assets, weighted according to the proportion of each capital component—equity, debt, and preferred stock. It represents the minimum return a company must earn on its investments to satisfy investors and creditors. To calculate WACC, each source of capital is multiplied by its respective cost, and the results are summed. For example, equity may have a higher cost due to greater risk, while debt is often cheaper but increases financial risk. WACC is an essential metric in financial decision-making and capital budgeting, as it serves as a hurdle rate for evaluating investment projects. A lower WACC suggests cheaper financing and greater potential for value creation through investment opportunities.