Definition of WACC
Weighted Average Cost of Capital. The WACC is the average return expected by investors, taking into account the funding mix (shares and loans). Companies are funded by a combination of shares and loans. Assuming that equity costs approx 10% (because the shareholders are taking a relatively big risk and therefore expect a reasonably high return) whereas debt cost the company approx 5% (after tax relief), the weighted average cost of capital for a company which is funded 50% by equity and 50% by debt, will be 7.5%.
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