What is Weighted Average Cost of Capital (WACC)?
The blended rate a business pays for all its capital - the hurdle every investment must clear.
Weighted Average Cost of Capital (WACC): definition
Every dollar of financing has a cost - interest on debt, expected return for equity holders. WACC blends these into a single rate that represents the minimum return the business must earn to satisfy all its capital providers. It is the standard discount rate for NPV and the hurdle rate for investment decisions: projects should return more than WACC to create value.
Weighted average cost of capital
WACC = (E/V × Re) + (D/V × Rd × (1 − Tax Rate))
E = equity, D = debt, V = total capital, Re = cost of equity, Rd = cost of debt. Debt is after-tax because interest is tax-deductible.
How Fintra handles it
Fintra can pull the debt and equity weights and the cost of debt from the ledger, letting you set a WACC that feeds NPV, IRR comparisons, and ROIC value-creation tests consistently across the plan. Because the inputs come from live financials, the hurdle rate reflects the actual capital structure rather than a stale assumption.
- Capital weights and cost of debt drawn from the live balance sheet
- WACC used as the discount rate for NPV and the hurdle for projects
- ROIC compared to WACC to test value creation
Worked example
Frequently asked questions
What does WACC tell you?
It tells you the minimum return a business must earn on its investments to satisfy all capital providers. Projects returning more than WACC create value; those returning less destroy it. It is the standard discount rate in valuation and capital budgeting.
Why is the cost of debt after-tax in WACC?
Because interest on debt is tax-deductible, the effective cost to the business is lower than the stated rate. Multiplying the cost of debt by (1 − tax rate) captures this tax shield, which is one reason debt financing can be cheaper than equity.
Why is equity more expensive than debt?
Equity holders bear more risk than lenders - they are paid last and have no guaranteed return - so they demand a higher expected return. Debt is also cheaper because of its tax deductibility. This is why capital structure affects WACC.
How is WACC used as a discount rate?
In NPV analysis, future cash flows are discounted at WACC to reflect the time value and risk of the capital funding them. Using WACC ensures a project is judged against the actual cost of the money invested in it. Fintra applies it consistently in planning.
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