Fundamental Glossary / Valuation Methods
Weighted Average Cost of Capital (WACC)
The blended required return of equity and debt, weighted by their share of the capital structure.
Formula
WACC = cost of equity x equity weight + after-tax cost of debt x debt weight. Weights should be target market-value weights.
What it means
WACC is the discount rate for free cash flow to the firm. It is the return the operating business must earn to satisfy both lenders and shareholders.
The tax shield on interest is why the cost of debt is taken after tax, in the standard corporate-finance form.
How to read it
A ROIC above WACC means the firm earns more than its capital requires. That spread, reinvested, is the source of value creation in a DCF.
What to watch
Using book weights, an outdated share price, or a cost of equity copied from another country will produce a precise and wrong WACC. Match the currency of the cash flows and the rate.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.