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When calculating the weighted average cost of capital, weights are based on how much debt and equity the company uses.
What is the weighted average cost of capital (WACC)?
Bondholders' or shareholders' average cost to attract investors is shown by the weighted average cost of capital (WACC). The computation gives internal initiatives or possible acquisitions a clear hurdle rate by weighting the cost of capital based on how much loan and equity the firm utilizes.
Because WACC expresses the return that both bondholders and shareholders require in order to provide the company with capital in a single number, it is frequently used to calculate the required rate of return (RRR). Because investors will demand higher returns, a company's WACC is likely to be higher if its stock is relatively volatile or if its debt is regarded as risky.
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