WACC
ValuationDefinition
Weighted Average Cost of Capital. The blended rate a company pays for the money it uses to run the business. A company raises money two ways: by borrowing (debt) and by selling shares (equity). WACC mixes the cost of each, weighted by how much of each the company uses.
WACC is the hurdle rate. If a project returns more than the company's WACC, it creates value. If less, it destroys value. WACC is also the discount rate used in DCF models to figure out what future cash flows are worth today.
WACC is the hurdle rate. If a project returns more than the company's WACC, it creates value. If less, it destroys value. WACC is also the discount rate used in DCF models to figure out what future cash flows are worth today.
Formula
WACC = (Equity / Total capital) times cost of equity + (Debt / Total capital) times cost of debt times (1 minus tax rate)
Example
A company has $60M of equity (investors demand 10% return) and $40M of debt at 5% interest. Tax rate is 21%. WACC = (60% times 10%) + (40% times 5% times 79%) = 6% + 1.58% = 7.58%. Any project must beat that to make sense.