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how do companies make financial decisions based on WACC

how do companies make financial decisions based on WACC

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Weighted average cost of capital (WACC) is a benchmark for internal rate of return. A firm’s WACC reflects the average risk of the projects, which make up the firm. The cost of debt only measures the amount of debt used in a company’s capital structure. It is for these reasons that the marginal cost of capital is a relevant concept for evaluating investment projects compared to historic cost of capital.

It helps managers understand how a project fully backed by debt differs in terms of cost from one funded by largely by equity.

It helps to determine if it is profitable to undertake a project. It is used in capital budgeting decisions. A project is funded if the cost of the project is lower than the weighted average cost of capital.

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