Weighted Average Cost of Capital (WACC)

WACC calculates a Company’s average Cost of Capital from all sources of capital, Common and Preferred Stock and Debt. WACC is expressed as a percent, setting a Benchmark return for future investments.

Companies need to fund their operations via a combination of Debt and Equity. The cost of Debt is simply the Interest Rate, minus the tax shield, an obligation paid to Debt Holders. The cost of Equity is the Dividend payment paid to Equity Holder. For Common Stock this is not an obligation but an expectation. For Preferred Stock it is an obligation, which can be quantified. The Weighted Average Cost of Capital (WACC) calculates a Company’s average Cost of Capital including Common Stock, Preferred Stock and Total Debt. The WACC is expressed as a percent. The percent calculated determines the required rate of return on forthcoming CAPEX programs. For an acquisition, a benchmark rate of return is set for the acquisition to be additive.