Weighted Average Cost of Capital (WACC)
Weighted Average Cost of Capital (WACC) is a financial metric used to measure a company’s cost of capital. It is the average rate of return a company must pay to its investors to finance its assets. WACC is calculated by taking into account the relative weights of each component of the company’s capital structure, such as debt, preferred stock, and common stock. The WACC is used to measure the cost of capital for a company and is used to determine the rate of return required by the company’s investors.
History of WACC
The concept of WACC was first introduced by Franco Modigliani and Merton Miller in 1958. They proposed that the cost of capital for a company is the weighted average of the cost of each component of the company’s capital structure. Since then, WACC has become an important tool for financial analysts and investors to measure the cost of capital for a company. WACC is also used by companies to determine the rate of return required by their investors.
Comparison Table
| Component | Weight | Cost |
|---|---|---|
| Debt | 50% | 5% |
| Preferred Stock | 25% | 7% |
| Common Stock | 25% | 10% |
| WACC | 7.5% |
Summary
Weighted Average Cost of Capital (WACC) is a financial metric used to measure a company’s cost of capital. It is the average rate of return a company must pay to its investors to finance its assets. WACC is calculated by taking into account the relative weights of each component of the company’s capital structure, such as debt, preferred stock, and common stock. The WACC is used to measure the cost of capital for a company and is used to determine the rate of return required by the company’s investors. For more information about WACC, you can visit websites such as Investopedia, The Balance, and Investing Answers.
See Also
- Cost of Equity
- Cost of Debt
- Capital Structure
- Return on Equity
- Return on Investment
- Debt to Equity Ratio
- Debt to Asset Ratio
- Interest Coverage Ratio
- Discounted Cash Flow
- Net Present Value
