What is WACC  Weighted Average Cost of Capital  Summary and Q&A
TL;DR
WACC is a calculation that determines a company's cost of capital by considering the costs of debt, preferred shares, and equity.
Questions & Answers
Q: What does WACC stand for and what does it calculate?
WACC stands for weighted average cost of capital. It calculates the cost of capital for a company by taking into account the costs of debt, preferred shares (if applicable), and equity.
Q: How is the percentage of debt and equity determined for calculating WACC?
The percentage of debt and equity is determined based on the market value of a company. Divide the amount of debt by the total market value to get the percentage of debt, and subtract this from 100% to get the percentage of equity.
Q: What is the significance of the tax adjustment in the WACC formula?
The tax adjustment is applied to the cost of debt because interest payments are often taxdeductible. By factoring in the tax rate, the cost of debt can be adjusted accordingly.
Q: How can WACC be used as a discount factor in valuation techniques?
WACC can be used to discount expected cash flows, determining their present value. This allows for the evaluation of whether a company's stock is undervalued or overvalued based on its current trading price.
Summary & Key Takeaways

WACC, or weighted average cost of capital, is a way to calculate the cost of capital for a company by considering various factors.

The formula for calculating WACC may seem complex, but it becomes intuitive once broken down into its components.

WACC is used to determine if a company should invest in a project and can also be used as a discount factor in valuation techniques.