# weighted average cost of capital

weighted average cost of capital
= WACC
A method for calculating the average cost of a company's different sources of finance. The WACC is calculated on the assumption that the company will maintain the same debt–equity ratio. Managers should only use the WACC as an appropriate discount rate for a project when the project has about the same level of risk as the company. The most difficult part of the calculation is the estimate for the cost of equity.
In theory, a company can lower its weighted average cost of capital by increasing the proportion of debt. However, this could become a problem for shareholders, who may feel that higher levels of debt will increase the risk of their investment.
A company has a capital structure of 50% debt and 50% equity. If it is assumed that the after-tax cost of loan capital is 8% and the cost of equity share capital is 16%, then the weighted average cost of capital can be calculated as follows:
(proportion of loan capital × cost of loan capital) + (proportion of equity capital × cost of equity capital) = (0.5 × 8%) + (0.5 × 16%) = 12%

Accounting dictionary. 2014.

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• Weighted average cost of capital — (WACC) (deutsch gewichtete durchschnittliche Kapitalkosten) bezeichnet einen zu den Discounted Cash Flow Verfahren der Unternehmensbewertung gehörenden Ansatz.[1] Die gewichteten durchschnittlichen Kapitalkosten werden von vielen Unternehmen… …   Deutsch Wikipedia

• Weighted average cost of capital — The weighted average cost of capital (WACC) is the rate that a company is expected to pay to finance its assets. WACC is the minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of… …   Wikipedia

• weighted average cost of capital — WACC A method for calculating the average cost of a company s different sources of finance. The WACC is calculated on the assumption that the company will maintain the same debt equity ratio Managers should only use the WACC as an appropriate… …   Big dictionary of business and management

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• Weighted Average Cost Of Capital - WACC — A calculation of a firm s cost of capital in which each category of capital is proportionately weighted. All capital sources common stock, preferred stock, bonds and any other long term debt are included in a WACC calculation. All else equal, the …   Investment dictionary

• weighted average cost of capital — ( WACC) 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… …   Financial and business terms

• weighted-average cost of capital — ( WACC) 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… …   Financial and business terms

• weighted-average cost of capital — noun A calculation of the overall cost of capital used by an enterprise, made by totalling the cost of each source of capital used multiplied by its proportional share of the total capital used. Abbreviation: WACC. <! For each of n sources of… …   Wiktionary

• weighted average cost of capital — WACC A corporation’s *costs of capi tal derived from and *weighted in proportion to the capital structure of its *equity and *debt finance …   Auditor's dictionary

• Weighted average cost of capital — Expected return on a portfolio of all the firm s securities. Used as a hurdle rate for capital investment. The New York Times Financial Glossary * * *    ► See WACC …   Financial and business terms