Weighted Average Cost of Capital

Definition: Weighted Average Cost of Capital is the average rate (percentage) a firm has to pay its various security holders to finance its business, operations and growth and pay.
WACC is used as the minimum return a company must earn when deciding on certain investments, strategies, projects or purchases.
Example:
- Total market value of debt = €800 million, of which market value of debt = €250 million and market value of equity = €550 million
- Cost of Debt = 7%
- Corporate Tax Rate = 36%
- Cost of Equity is 14%
Calculation WACC = ( 250/800 * 7% * (1 - 36%) ) + ( 550/800 * 14% ) = 11.01%
This means any investment should have a minimal rate of return of 11.01% to make it worthwhile.

💡

Learn more about Weighted Average Cost of Capital.

More on investing: Alternative Investments, Asset Management, Break-even Point, BRIC Countries, Capital Structure, more on investing...

MBA Brief provides concise yet precise definitions of organizational concepts, management methods, and business models as taught in an MBA program.

We keep it short and provide links to high-quality websites where you can learn more about your topic.

Add MBA Brief to your desktop / iPad