The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average cost of financing a company’s assets, considering both debt and equity components.
Page written by Ian Hawkins. Last reviewed on May 17, 2024. Next review due March 1, 2025.
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
WACC, or Weighted average cost of capital, is a financial metric used to assess a company’s cost of capital. Alongside being a financial metric that represents the average cost of financing a company’s assets, it represents the average rate of return a company is expected to pay to all its investors, including shareholders and debt holders, for funding its operations. The lower the WACC in relation to the company’s return on investment (ROI), the better.
To calculate the weighted average cost of capital:
Calculating WACC for a private company involves estimating the company's cost of equity and cost of debt. The cost of equity can be derived from comparable publicly traded companies or through methods like the capital asset pricing model (CAPM). The cost of debt can be estimated by analysing the interest rates on similar corporate bonds or loans.
A higher WACC typically indicates a higher cost of capital for the company, which can be considered unfavourable as it may reduce the company's investment opportunities and profitability. However, WACC should be assessed in comparison to the company's return on investment to determine its overall impact on value creation.
There is no universally applicable benchmark for a "good" WACC score, as it varies depending on factors such as industry, market conditions, and the company's risk profile. Generally, a WACC lower than the company's return on investment signifies value creation, while a WACC higher than the return on investment may indicate value destruction.
UK
IRE
AU
CA
US
ZA
NG
yet? Register here!