WACC

Weighted Average Cost of Capital \u2014 the blended rate a company pays to finance itself, combining the cost of debt (after tax) and the cost of equity, weighted by their proportions. Used as the discount rate in DCF models. If ROIC exceeds WACC, the company creates value; if not, it destroys it.

Why it matters

The hurdle rate for all corporate investment decisions and the discount rate in DCF models. A company creates value only when its return on invested capital exceeds WACC.

How to read it

Typical range: 8\u201312%. Sensitive to the equity risk premium assumption \u2014 small changes in inputs produce large valuation swings. Use sector-appropriate cost of equity (CAPM: risk-free rate + beta \u00d7 equity risk premium).

Source

Modigliani & Miller (1958). "The Cost of Capital, Corporation Finance and the Theory of Investment."

Lessons that use this term

• ROIC: The Truth About Business Quality
• Cost of Capital: What Discount Rate to Use
• Capital Allocation: The CEO's Five Choices
• The DCF Framework: From Theory to Model
• WACC: The Discount Rate That Makes or Breaks Your Model
• WACC Construction (Practitioner Depth)
• Leverage and the Cost of Capital: Modigliani-Miller
• Capital Structure Optimization: Finding the Sweet Spot

Related terms

Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta

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