What does WACC stand for in corporate finance?

WACC stands for Weighted Average Cost of Capital, and it represents the overall cost of capital for a firm, weighted according to the proportion of each component of capital in the firm's capital structure. This includes both debt and equity financing.

The calculation of WACC involves determining the cost of each source of capital—debt, equity, and possibly preferred equity—by multiplying each component's cost by its respective weight (the proportion of the total capital represented by each source). The resulting values are then summed to arrive at a single average cost that reflects the expected return required by all capital providers.

WACC is a critical metric in corporate finance as it is used to evaluate investment opportunities, assess financial performance, and make decisions regarding capital budgeting. A lower WACC indicates that a company can finance its operations at a lower cost, making it more likely to pursue profitable investments, whereas a higher WACC may indicate higher risks associated with investment, leading management to be more cautious in pursuing new projects.