What Is WACC?


Quick Answer

WACC is a business term that stands for "weighted average cost of capital." WACC is the average after-tax cost of all forms of a business's capital. Capital taken into consideration when calculating the WACC includes retained earnings, common stock, preferred stock and debt.

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Full Answer

The formula used to calculate WACC is the weight of the financing type times the cost of the financing type. The weights of the financing types are based on the target market values of the financing type, while the cost is based on the yield to maturity of the financing type. When there are multiple finance types involved, the weight times the cost of each is added together. The WACC is used for investment analysis because it represents the risk a company faces due to its debt load.

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