Weighted Average Cost of Capital

The minimum return on capital that a firm must expect to earn on its investments to attract new capital and to maintain its current value. Weighted Average Cost of Capital (WACC) is an expression of this cost and is used to see if certain intended investments or strategies or projects or purchases are worthwhile to undertake. In estimating WACC, the Capital Asset Pricing Model (“CAPM”) is widely applied to estimate the cost of equity. The CAPM is based on the assumption that an investor in a risky asset requires additional return to compensate for bearing additional risk.