WACC estimates the average return a company must earn on its existing capital structure to satisfy both lenders and shareholders. Equity usually costs more than debt because owners take more risk. Analysts use WACC as a discount rate when valuing projects or the firm as a whole.
Key takeaways
- Weights should reflect the market value mix of debt and equity when possible, not only book figures.
- A lower WACC makes future cash flows look more valuable in a discounted model, all else equal.
- Tax treatment of interest can reduce the after tax cost of debt in many systems.
- WACC is an estimate built on assumptions about risk and target structure, not a market quote you can look up like a share price.