How is WACC calculated?

The weighted average cost of capital (WACC) is a firm's cost of the capital where each category of capital is proportionately weighted.

WACC is commonly used as a benchmark rate against which companies and investors can assess the attractiveness of a particular project or acquisition.

It is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, then totaling the products.

In discounted cash flow analysis, WACC is also used as the discount rate for future cash flows.

WACC and its formula are useful for analysts, investors, and company executives, who all use it for different reasons. Determining a company's cost of capital is critical in corporate finance for several reasons.