Valuation and investment
Cost of capital (WACC)
The return a company must earn to satisfy its lenders and owners.
Last reviewedWhat 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?
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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.