Weighted average cost of capital (WACC)
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
The blended after-tax cost of a firm's debt and equity financing, weighted by their market-value capital-structure shares: WACC = (E/V) · r_e + (D/V) · r_d · (1 - T), where V = E + D. The hurdle rate for unlevered free cash flows in DCF valuation.
Weighted average cost of capital (WACC) in plain English
When a company raises money it usually mixes two sources: borrowing (debt, like a loan it must repay with interest) and selling ownership shares (equity, where investors expect a return). WACC is simply the company's overall "cost of money" — a blended average of what it pays lenders and what it owes shareholders, weighted by how much of each it uses. It matters because any new project has to earn MORE than this blended rate to be worth doing, so WACC acts as the pass/fail bar (the "hurdle rate") for investments. One twist: interest on debt is tax-deductible, so the formula multiplies the debt cost by (1 - T) to reflect that the government effectively refunds part of the interest.
Also called: WACC
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