# Weighted Average Cost of Capital (WACC)

### Written byTrue Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 14, 2022

## Weighted Average Cost of Capital (WACC) Definition

The weighted average cost of capital (WACC) is the implied interest rate of all forms of the company’s debt and equity financing which is weighted according to the proportionate dollar-value of each.

The formula for calculating the weighted average cost of capital is the proportion of total equity (E) to total financing (E + D) multiplied by the cost of equity (Re) , plus the proportion of total debt (D) to total financing (E + D), multiplied by the cost of debt (Rd), multiplied by one minus the tax rate (T).<h2>Formula for WACC in Simple Terms</h2> The total cost of debt is typically the stated interest rate, minus the tax benefit derived from interest payments being deductible.

Because equity has no stated cost, the formula often uses the Capital Asset Pricing Model, where the cost of equity is estimated to be the return that investors expect to receive from their investment.

## The Purpose of WACC

WACC is also used by company management to evaluate decisions such as capital projects, mergers and acquisitions, and other large-cost transactions in order to ensure that their WACC and Capital Structure are within investor expectations.

If a company determines that they have a WACC which is too high, they can mitigate this by renegotiating debt or authorizing a share buy-back to reduce the proportion of equity to total financing.

## Making Decisions with WACC

WACC is also used by company management to evaluate decisions such as capital projects, mergers and acquisitions, and other large-cost transactions in order to ensure that their WACC and Capital Structure are within investor expectations.

If a company determines that they have a WACC which is too high, they can mitigate this by renegotiating debt or authorizing a share buy-back to reduce the proportion of equity to total financing.

## What is WACC (Weighted Average Cost of Capital) FAQs

### What does WACC stand for?

WACC stands for the Weighted Average Cost of Capital.

### What is the WACC?

The weighted average cost of capital (WACC) is the implied interest rate of all forms of the company’s debt and equity financing which is weighted according to the proportionate dollar-value of each.

### How is the WACC calculated?

The total cost of debt is typically the stated interest rate, minus the tax benefit derived from interest payments being deductible.

### What is the purpose of the WACC?

WACC is also used by company management to evaluate decisions such as capital projects, mergers and acquisitions, and other large-cost transactions in order to ensure that their WACC and capital structure are within investor expectations.

### How can a company lower a WACC that is too high?

If a company determines that they have a WACC which is too high, they can mitigate this by renegotiating debt or authorizing a share buy-back to reduce the proportion of equity to total financing.