← Business Metric: Financial (all topics)
WACC & the cost of capital
What it is
The blended cost of a company's debt and equity, weighted by their share of the capital structure. It is the hurdle a project must clear to create value, and the discount rate applied to future cash flows
Earning above it creates value; below it, growth destroys value however fast revenue rises
Impact on industries
- Converts an abstract question about whether a business is worth running into a testable threshold against returns
- Falling interest rates reduce it mechanically, which is why the same project becomes viable in an easing cycle
- Cost of equity cannot be observed and must be estimated, so the number carries a wide margin of judgement
- Using a single company-wide rate misprices divisions of different risk, subsidising the risky at the expense of the stable
- Indian cost of capital sits well above developed-market levels, so projects viable elsewhere fail the test here