WACC | MoneyWeek

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).

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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

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

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.