What does WACC stand for?

WACC stands for Weighted Average Cost of Capital. It is an essential financial metric used to measure a company's cost of capital, where each source of capital is proportionately weighted. WACC reflects the average rate that a company is expected to pay to finance its assets, considering both equity and debt financing.

The calculation of WACC incorporates the cost of equity, which represents the returns required by equity investors, and the after-tax cost of debt, which reflects the interest expense of borrowed funds adjusted for tax benefits. By averaging these costs based on their respective weights in the overall capital structure, WACC provides insights into the minimum return that a company must earn on an investment in order to satisfy its investors.

Understanding WACC is vital for investment decisions, valuation models, and assessing the financial health of a company. It serves as a critical benchmark for evaluating the required returns for projects and investment opportunities.