What does WACC stand for in financial analysis?

WACC stands for Weighted Average Cost of Capital, which is a fundamental concept in financial analysis. It represents a firm's average cost of capital from all sources, including equity and debt, weighted according to the proportion of each source in the company's capital structure. This metric is crucial as it reflects the minimum return that a company must earn on its investments to satisfy its investors and creditors.

In practice, WACC is used for various financial evaluations, including investment appraisal and valuation models. A company seeking to undertake new projects will look at its WACC to measure whether those projects are likely to generate returns exceeding this cost. If a project's expected return is below the WACC, that project may not be a worthwhile investment, as it would not cover the costs of funding. Therefore, WACC serves as a critical benchmark in financial decision making, guiding firms in assessing the viability and profitability of their investment opportunities.