Corporate Finance

Cost of Capital and WACC

Learn the number serious companies test every decision against (what capital actually costs) and how to compute and use a WACC without a finance degree.

  • Intermediate
  • 7 min total
  • 12 chapters

What decision this helps you make: Which projects, purchases, and investments clear the bar, and which quietly destroy value even while "making money."

What this topic is

The cost of capital is what your money HAS to earn before a project creates any value, because the money itself isn't free. WACC (weighted average cost of capital) is the standard way to compute it: blend what equity holders require with the after-tax cost of debt, weighted by how the company is financed.

Why it matters

A project earning 8% sounds fine, until you learn the capital funding it costs 10%. Then it's a slow leak dressed as a win. The cost of capital is the line between growth that builds value and growth that burns it, and it's the discount rate behind nearly every serious valuation.

Who should learn it

Managers who propose or approve spending, students headed into finance or strategy roles, and owners deciding where next year's profit should go.

What you will understand

  • Why money is never free, even your own
  • Compute a WACC from equity cost, debt cost, and the mix
  • Use a hurdle rate to accept or kill projects
  • Spot when the company-wide rate is the wrong bar

Prerequisites

Common misconception

"If a project makes money, it's worth doing." Profit isn't the bar. The cost of the capital funding it is. A project returning 8% funded by capital costing 10% loses 2% a year while looking profitable on paper. Value is created only ABOVE the cost of capital.