Financial modelling terms explained

WACC

Weighted average cost of capital (WACC) is a financial ratio that determines the blended cost of capital of a company, based on the proportion of debt and equity used to finance the company's assets.

What is WACC?

The weighted average cost of capital (WACC) is the average rate of return that a company expects to earn on its future investments. The WACC is calculated by taking into account the company's current debt and equity mix, and the cost of debt and equity capital for each type of funding.

The cost of debt is the interest rate that the company pays on its current debt. The cost of equity is the rate of return that the company expects to earn on its next round of equity investments. The WACC is the weighted average of the two costs, with the weights reflecting the company's current debt and equity mix.

The WACC is an important metric for financial analysts because it can be used to determine the attractiveness of potential investments. A company with a high WACC is less attractive to investors because it is less likely to earn a higher rate of return on its investments. A company with a low WACC is more attractive because it is more likely to earn a higher rate of return on its investments.

What is the Formula for WACC?

The weighted average cost of capital (WACC) is a formula that calculates a company's cost of capital by taking into account the company's debt and equity financing. The WACC formula is as follows:

WACC = (1 - t) * (D/V) * Kd * (1 - t) + t * E/V * Ke

Where:

D = the company's debt

V = the company's total value

Kd = the company's cost of debt

Ke = the company's cost of equity

t = the company's tax rate

What is WACC Used For?

The weighted average cost of capital (WACC) is the average of the costs of all the different sources of financing a company has used. It is used to calculate the return required by shareholders, who are the providers of capital. The WACC takes into account the riskiness of the company's assets and the proportions of debt and equity used to finance them.

Who Uses WACC?

The weighted average cost of capital (WACC) is used by businesses to determine the average cost of capital for all of the different sources of finance used to fund the business. This includes both debt and equity. The WACC takes into account the risk associated with each type of finance and the required return investors demand for taking on that risk.

The WACC is used by businesses to make decisions about whether to use debt or equity to finance their operations. Businesses will want to finance their operations with the lowest WACC possible. The WACC is also used to determine the value of a business. The lower the WACC, the more valuable the business is.

What's the Difference Between WACC and WAC?

WACC is the weighted average cost of capital. It is the average of the costs of the various sources of finance used by a company, weighted by the use of each source. For example, if a company has $1 million of debt and $2 million of equity, and the interest rate on the debt is 10%, the WACC would be 11% ($1 million x 10% + $2 million x 5% = 11%).

WAC is the weighted average cash flow. It is the average of the cash flows from the various sources of finance used by a company, weighted by the use of each source. For example, if a company has $1 million of debt and $2 million of equity, and the cash flow from the debt is $100,000, the WAC would be $50,000 ($1 million x $100,000 + $2 million x $0 = $50,000).

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