WACC stands for the weighted average cost of capital. It is a term used in finance that measures a corporation's cost of capital by dividing it into two main sources of capital.
Background
Capital in corporations comes from two sources: debt and equity. Debt is money a corporation borrows, while equity is money raised through the sale of corporate securities, including bonds and notes, common stock and preferred stock.
Description
The WACC measures the capital within the corporation and weighs each component of capital. This is used for analyzing the cost of a corporation's capital.
Process
A corporation's WACC is calculated by multiplying each component of capital by its proportional weight. This process tells a company how much interest the company must pay for every dollar it has in debt.
Results
A company calculates the WACC and then compares it to potential investments. If investment projects have a return they expect is greater than the WACC, the result is an increase in stockholder's value. If an investment has a projected return less than WACC, the investment should be avoided because there will most likely be a decrease in stockholder's value.
