Weighted average cost of capital is a discount rate used in valuation model reflecting the opportunity cost of all capital providers, weighted by their relative contribution to the company's total capital.
the average of the cost of equity and the after-tax cost of debt. This average is determined using weight factors based on the ratio of equity to debt plus equity and the ratio of debt to debt plus equity.
The Required Rate of Return that must be paid or received by all of the investors with respect to a company's securities. Used as a hurdle rate for capital. The relative proportions of equity and debt in a company's capital structure determine the weightings.
The average cost of the company's finance (equity, debentures, bank loans) weighted according to the proportion each element bears to the total pool of capital. Weighting is usually based on market valuations, current yields and costs after tax.
When making an investment for the future, a company must determine whether that investment will earn enough of a return to justify the commitment. The fundamental issue is whether the cost of the funding is more than recouped by the profit made on the investment. As such, a company calculates its WACC, and uses this as a benchmark against which it judges potential investments. As debt capital is cheaper to finance than share capital, a company's WACC reduces when it assumes a greater proportion of debt to equity in its financing.
(WACC): The overall cost of a company's financing calculated as the average of the after-tax interest rate on the company's debt and required rate of return on the company's equity weighted by the respective proportion of debt and equity in the company's capital structure. The WACC represents the capital market's overall assessment of the rate of return that should be earned by the company to cover the pure time value of money, the risk premium and expected future inflation. The WACC provides the company with the benchmark discount rate for evaluating average-risk projects.
Market cost of debt and cost of equity capital (equity capital cost calculated assuming equity risk premium of 4% and using London Business School beta factor, average for last year 0.48%) applied to fair value of debt and equity market capitalisation and then suitably weighted (quoted pre-tax).
A measure of the cost of capital for a given entity, comprising both debt and equity, which is required to service debts and to maintain a return on equity and thus maintain solvency. The WACC can be calculated for specific companies listed on the stock exchange, based on the return required to service debts and to provide dividends based on the number of issued shares. The WACC can be used as a comparison with adopted discount rates for discounted cash flow. In general, the WACC is calculated for companies which are within a similar asset class to that of the subject asset. Typically, in respect of real estate, analysed companies include managed funds, trusts and companies dealing specifically in property investment or development.
rate of return determined as the weighted average of the after-tax cost of debt and levered equity. WACC assumes an ability to deduct interest expense when calculating taxable income and can be used either as a discount rate (inclusive or exclusive of inflation) or a capitalization rate. When applied to a stream of cash flows, the result is enterprise value.
A model that evaluates the cost and tax implications of borrowed funds. It is also capable of calculating the cost of using equity funds and the impact of flotation costs upon the firm or a specific project.
The computed cost of capital determined by multiplying the cost of each item in the optimal capital structure by its weighted average in the overall capital structure and totaling the results. It represents the weighted average return expected by both equity and debt investors.
Expected return on a portfolio of all a firm's securities. Used as a hurdle rate for capital investment. Often the weighted average of the cost of equity and the cost of debt The weights are determined by the relative proportions of equity and debt in a firm's capital structure.
The weighted average cost of capital (â€œWACCâ€) is the average cost of the businessâ€(tm)s finance. This is calculated by applying a weighting to the different costs of finance according to the relative size of each element in the financial structure of a business.
The weighted average cost of capital (WACC) is used in finance to measure a firm's cost of capital. It has been used by many firms in the past as a discount rate for financed projects, since the cost of the financing seems like a logical price tag to put on it.