The Weighted Average Cost of Capital, or WACC, provides a comprehensive view of a company's cost structure by incorporating the costs associated with both debt and equity financing. This measure is significant as it accounts for the weighted risk associated with each source of capital. Equity is typically riskier than debt, reflected in a higher cost because, in the event of liquidation, equity investors are paid after debt holders.
In business, WACC is crucial for several reasons:
As a result, WACC reflects the cost of capital and serves as a strategic tool in financial planning and corporate governance.
From Chapter 8:
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