What Is WACC? A Practical Guide for Investment Banking

Weighted average cost of capital, or WACC, is the blended return a company’s debt and equity investors require. It matters because bankers commonly use it to discount cash flows in a discounted cash flow valuation, and even a modest change can materially affect enterprise value.

Author: Michael Harris Updated 5 min read

What WACC Measures

A company typically finances its operations with a combination of debt and equity. Lenders expect interest payments. Shareholders expect a return that compensates them for taking greater risk. WACC combines these required returns into one percentage, weighted by each source’s share of the company’s capital structure.

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