WACC (Weighted Average Cost of Captal)

The WACC (weighted Average Cost of Capital) is a fundamental evaluation of a corporation. It takes into consideration a company’s debt and equity.

The formula looks like this

WACC= (% of capital that is equity)*(cost of equity) + (% of capital that is debt)*(Cost of Debt)*(1-corperate tax)

Companies can raise money a variety of different ways, it can issue bonds, stock, executive stock options, act. This formula just puts into perspective where the capital came from and at what percentage it has to get paid back.

This gives us the minimum amount a company needs to make for it to be profitable. For instance if the Weighted Average Cost of Capital is 11% a company must make over 11% to make money. If it does not make over 11% then it is not profitable.