In finance, calculating a weighted average discount rate, or WACC, is critical for determining the cost of capital and valuing investments and projects. WACC represents the average rate of return investors expect on a company’s combination of debt and equity financing, weighted by their relative proportions in the capital structure.
The WACC formula accounts for the cost of debt, cost of equity, debt ratio, and equity ratio. Its importance lies in its ability to assess investment proposals, compare funding options, and make informed financial decisions by considering both debt and equity financing costs.