Weighted average cost of capital (WACC)

Last updated: 16.03.2016

WACC is the mixed cost rate of all possible sources of finance that the company uses (equity, debt, preference shares, retained earnings…). It is calculated as the sum of the rates for each capital type that are weighted by the proportion of each capital type on the total capital amount.

WACC represents the minimum return that is required from an investment project. It is often used as a discount rate in DCF calculations and as a hurdle rate.



Ke = cost of equity

Kd = cost of debt

MV = market value


Market value in the WACC formula can be replaced by book value (value from balance sheet).  Naturally, market values are preferred as they better reflect reality. But these values are of course more difficult to obtain.


The main problem with WACC used in investment projects appraisals is that it assumes that:

  • the investment is exposed the same risk profile as the entire company – if the business risk is different, it can be resolved by calculating risk adjusted WACC 
  • and existing mix of funding sources (debt, equity) will remain unchanged – this can be resolved by using Marginal cost of capital (MCC) instead or Adjusted present value for investment appraisal

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