What is WACC?

Weighted average cost of capital (WACC) is a financial metric that represents a company's cost of capital, or the required rate of return that a company must earn to satisfy its stakeholders. WACC is used to evaluate a company's capital structure, which refers to the mix of debt and equity that the company uses to finance its operations and growth.

WACC is calculated by taking into account the cost of each component of a company's capital structure (such as debt, preferred stock, and common equity) and weighting it by its relative importance. The cost of each component is typically expressed as a percentage, and the weights are typically based on the relative market values of the different components.

For example, if a company has $50 million in debt, $20 million in preferred stock, and $30 million in common equity, and the cost of debt is 5%, the cost of preferred stock is 8%, and the cost of common equity is 12%, the WACC can be calculated as follows:

WACC = (Weight of debt x Cost of debt) + (Weight of preferred stock x Cost of preferred stock) + (Weight of common equity x Cost of common equity)

= (50 / 100) x 5 + (20 / 100) x 8 + (30 / 100) x 12

= 2.5 + 1.6 + 3.6

= 7.7%

WACC is an important metric for companies and investors, as it reflects the required rate of return that a company must earn to satisfy its stakeholders and create value for its shareholders. It is used to evaluate the efficiency of a company's capital structure and the potential returns of different investments.