What does WACC stand for in finance?

The term WACC stands for Weighted Average Cost of Capital. This concept is fundamental in finance, as it represents a firm's average cost of capital from all sources, including equity and debt. The WACC is calculated by weighing the cost of each capital component—equity, debt, and any other forms of capital—according to their proportion in the overall capital structure of the company.

This calculation is significant because it helps companies assess the minimum return that they need to generate to satisfy their investors or creditors. Using WACC, firms can make informed decisions about investment opportunities, capital budgeting, and financial strategy, ensuring that they are maximizing value for their shareholders while considering the risks associated with different funding sources.

Understanding WACC is crucial for evaluating new projects or investments, as a project that returns more than the WACC adds value to the firm, while one that returns less would decrease value. This metric plays a critical role in financial modeling and valuation, making it a central part of the study of corporate finance.