What does the abbreviation WACC stand for?

The abbreviation WACC stands for Weighted Average Cost of Capital, which is a key financial metric used to evaluate the cost of funding a company's operations through both debt and equity. WACC represents the average rate of return that a company is expected to pay to its security holders to finance its assets.

In calculating WACC, the cost of each component of the capital structure (debt and equity) is weighted based on its proportion in the overall capital mix. This metric is particularly important for investors and companies as it is used as a hurdle rate against which to evaluate the return on investment (ROI) of projects or investments. If a company aims to take on new projects or investments, they must ensure that the expected returns exceed the WACC to create value for shareholders.

This understanding of WACC helps in decision-making regarding financing and investment strategies, as it reflects the opportunity cost of investing in a project relative to the overall market return for similar risk investments.