WACC (Weighted Average Cost of Capital) is a key financial metric used to determine a company’s overall cost of capital by considering the proportionate weight of each capital component — equity, debt, and preference shares. It represents the average rate a company is expected to pay to finance its assets, helping investors and analysts evaluate the risk and return potential of a business.

In simple terms, WACC reflects the minimum return a company must earn on its existing assets to satisfy all its capital providers. It combines the cost of equity (returns expected by shareholders) and the cost of debt (interest payable to lenders), adjusted for their respective market values and tax benefits. The general formula is:

WACC = (E/V _ Re) + (D/V _ Rd _ (1 – Tc))

Where: E = Market value of equity, D = Market value of debt, V = Total value of capital (E + D), Re = Cost of equity, Rd = Cost of debt, and Tc = Corporate tax rate.

Understanding WACC is essential for investors, analysts, and corporate finance professionals. A lower WACC indicates a cheaper cost of financing, making it easier for companies to take on profitable projects. Conversely, a higher WACC signals increased risk or higher financing costs. Companies use WACC to make critical decisions like project evaluation, valuation models, and capital budgeting.

In investing, WACC serves as a benchmark for assessing whether a project or investment adds value. If a project’s expected return exceeds WACC, it’s considered value-accretive; if not, it may erode shareholder wealth. Understanding this concept enables better financial planning and more informed investment choices aligned with regulatory and ethical financial standards.