What does the term "WACC" stand for?

The term "WACC" stands for Weighted Average Cost of Capital, which is a crucial concept in finance and investment analysis. It represents the average rate of return that a company is expected to pay its security holders to finance its assets. WACC takes into account the cost of equity and the cost of debt, weighted according to the proportion of each in the firm's capital structure.

When calculating WACC, the cost of equity is determined using models such as the Capital Asset Pricing Model (CAPM), while the cost of debt is usually based on the yield of the company's debt instruments adjusted for tax benefits since interest expenses are tax-deductible. The WACC is important because it serves as a hurdle rate for investors and helps firms assess investment opportunities; projects that are expected to generate returns above the WACC are typically considered worthwhile.

Understanding WACC is essential for making informed decisions about capital budgeting, valuations, and financial management, as it influences the assessment of new projects, mergers, and the overall cost of financing.