Weighted Average Cost Capital (WACC)

Formal

The total cost of borrowing money and the dividend return required by shareholders, combined into an average annual percentage rate. Often used as the minimum level of return needed from incremental (investment) spend - to cover the minimum requirements of the people who provided the funding in the first place. Eg a company runs its business with £1 Million loan at 5% and the shareholders provided £1 Million of share capital on which they require 10% return. WACC = 7.5%

Real-world Example

A company is funded 60% by equity (costing 10%) and 40% by debt (costing 5% after tax). Its WACC is 8% - the blended cost of all its funding sources, weighted by how much of each it uses.