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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