Valuation and investment
Cost of capital (WACC)
The return a company must earn to satisfy its lenders and owners.
Facts checked against sources onWhat does Cost of capital (WACC) mean?
The cost of capital is the return a company needs to earn to satisfy the people who fund it. It is usually measured as the weighted average cost of capital (WACC): the cost of equity and the after-tax cost of debt, each weighted by its share of total funding. A project of average risk creates value when its return is above the WACC, which is why WACC is often used as the discount rate.
Where does it come up in case interview prep?
- Inventory and the cost of holding itLesson in Sourcing, trade and supply risk
- Macro forces that move casesLesson in Markets and economies: the world a case lives in
- What competitive advantage really isLesson in Why some businesses win: competitive advantage and the economics of strategy
- Using it in a case: is the advantage real?Lesson in Why some businesses win: competitive advantage and the economics of strategy
- Return on capital against its cost: ROIC and WACC in plain wordsLesson in Reading a business through its numbers: the three statements, cash and value
- Valuation in practice: multiples, a simple DCF, NPV, IRR and paybackLesson in Reading a business through its numbers: the three statements, cash and value
- Using this in a case: what to ask, what to calculate, what to sayLesson in Reading a business through its numbers: the three statements, cash and value
- ESG beyond carbon: governance, labour, supply chains and the EU rulesLesson in People, rules and responsibility: organisation, regulation and sustainability
Related terms
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- Return on investment (ROI)The gain from an investment relative to its cost.
- Payback periodHow long until an investment earns back its cost.
- Time value of moneyMoney today is worth more than the same money later.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.
Learn it in context
See Cost of capital (WACC) at work in a lesson from Sourcing, trade and supply risk, with checks as you go.
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