Definition of weighted average cost of capital
Weighted average cost of capital
The Weighted Average Cost of Capital (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. Let's assume that shareholder money costs approx 10% (because the shareholders are taking a relatively big risk and therefore expect a return which is higher than they could get risk free in Government bonds for example) whereas loans cost the company approx 5% (after tax relief). The weighted average cost of capital will be determined by the mix. If the company is funded 50% by equity and 50% by debt, then the WACC will be 7.5%.
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