What does WACC stand for?

WACC stands for Weighted Average Cost of Capital. It represents the average rate of return a company is expected to pay its shareholders (equity holders and debt holders) for using their funds in the business. The "weighted" aspect of WACC indicates that different sources of capital (such as equity and debt) have different costs and should be proportionally represented based on their contribution to the overall capital structure of the company.

In calculating WACC, the costs of each source of capital are multiplied by their respective weights, which are based on the market value of the company's debt and equity. This provides a comprehensive measure that reflects the overall required return for the enterprise, which is crucial for investment decisions, financial planning, and valuing corporate projects. Understanding WACC helps managers evaluate new projects, as any investment should ideally return more than the WACC to create value for shareholders.