Weighted Average Cost of Capital (WACC)
Blended rate of return required by debt and equity providers, used as investment hurdle rate
What is Weighted Average Cost of Capital (WACC)?
Weighted average cost of capital is the average rate a company pays to finance its assets, weighting the cost of equity and the cost of debt by how much of each it uses. It is the minimum return an investment must earn to create value.
Companies use it as the hurdle rate for investment decisions and to value future cash flows.
How this KPI is measured
- Function
- Finance
- Sub-function
- Treasury
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Annual
- Formula
- (Cost of equity × Equity weighting) + (Cost of debt × (1 − Tax rate) × Debt weighting)
How to calculate it
Multiply the cost of equity by the equity weighting, and add the cost of debt multiplied by one minus the tax rate and by the debt weighting.
For example, with a cost of equity of 10%, 60% equity, a cost of debt of 5%, a tax rate of 25% and 40% debt, WACC is (10% x 0.6) + (5% x 0.75 x 0.4) = 7.5%.
The cost of equity is the hardest part to estimate, and it is usually based on a model that reflects the company's risk.
Where it is used
Setting a hurdle rate
Judge investment returns.
Valuing projects and companies
Discount future cash flows.
Evaluating capital structure
Find a sensible mix of debt and equity.
How to improve it
Tips and common mistakes
- WACC is an estimate. Small changes in assumptions move it.
- Use different rates for very different risks.
- Compare project returns with WACC.
More Finance kpi library
Build better plans, faster
Join the waitlist for early access to curated insights, flexible templates, and rapid iteration across strategy, planning, and project management.