WACC
WACC stands for the weighted average cost of capital. It represents the rate of return a company must make on the money it has invested to stop investors putting their money elsewhere.
WACC stands for the weighted average cost of capital. It represents the rate of return a company must make on the money it has invested to stop investors putting their money elsewhere. In short, it is the company's cost of money.
To calculate it, you take the weighted average of the cost of borrowing money from banks or bondholders (debt) and shareholders (equity). The cost of debt is the interest rate charged by borrowers, less the company's tax rate (because interest charges reduce a company's taxable profits).
However, equity costs more than debt, because shareholders get paid last and so need to be paid more to reflect this. Exactly how much extra is subject to a lot of debate, and there is no right answer. It is affected both by how risky the underlying business is and how indebted it is.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Say a business is half-funded by debt at 5% and half-funded by equity at 10%. Its WACC will be (0.5x5%) + (0.5x10%) = 7.5%. WACC can be a better way to measure the ability of company managers than earnings per share (EPS). When interest rates are low, managers can boost EPS by funding the company with more debt, but may not earn a high enough return to compensate shareholders for the risks
-
Copycat banking websites on the rise - how to spot one
Over 2,000 banking copycat websites were reported as phishing scams in 2023, according to Which? But how do you know if the banking site you're about to use is real?
By Oojal Dhanjal Published
-
Saving for retirement: ISAs vs. SIPPs
Features SIPPs offer more generous tax breaks overall, but ISAs are more flexible. So, which is better?
By Marc Shoffman Last updated