WACC = Weighted Average Cost of Capital

What is WACC

WACC (Weighted Average Cost of Capital) is a financial metric that indicates the average cost of the capital a company uses to finance itself. It includes both equity and debt, and weights their costs according to their share in the overall capital structure.

Why WACC matters

• Measures the cost of financing – shows how expensive it is for the company to raise capital from investors and lenders.
• Serves as a discount rate – it is often used in the DCF model to calculate the present value of future cash flows.
• Helps evaluate investment projects – if the expected return on a project is higher than WACC, the project may increase the company's value.

What affects WACC

• Cost of equity – derived from the required return of investors (e.g. using the CAPM model).
• Cost of debt – usually lower than the cost of equity because interest is tax-deductible.
• Capital structure – the ratio of equity to debt can significantly change the resulting WACC.
• Market conditions – interest rates, inflation, and risk premiums.

How investors use WACC

• Company valuation – a lower WACC means the company can finance projects more cheaply, which increases its value.
• Peer comparison – companies in the same industry can be compared by their cost of capital.
• Evaluating investment returns – helps determine whether a planned project will deliver more value than the cost of financing it.

WACC on Stonkee

On Stonkee users can track WACC for individual companies and compare it with their historical results, industry averages, and other financial indicators.

Summary

WACC is a key metric that combines the cost of equity and debt into a single figure. It is used not only for company valuation but also for assessing investment projects and financial stability.