When making investment decisions, the risk level of the investment should always be compared against the expected return. The challenge in this process is evaluating the riskiness of the company being investigated. One tool often used by financial analysts is the Weighted Average Cost of Capital.
The WACC is defined as the expected rate of return from a company’s investments, weighted by the proportion of each to the overall capital structure. The capital, such as common and preferred stock, along with the expected return from the capital is considered, along with any debt, and the cost of that debt. The two figures are then weighted by their proportion to the overall capital, to come up with a single number.
A weighted average cost of capital (WACC) calculation is complex. Outsiders may need help calculating one on their own. To help, there are free WACC discount rate calculations available. Different calculations may come to different conclusions, but they should generally agree.
A WACC cost of capital calculation is best when used to make investment decisions. Low WACC calculations assume there are low debt and equity costs. Debt cost less for companies in good financial health and favorable credit markets. Equity cost more for volatile