Question of the day
2026-09-19
What is WACC and what does it represent?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
WACC (weighted average cost of capital) is the blended required return of all of a firm's capital providers, weighted by each source's share of the total capital structure. It represents the minimum return the business must earn on its assets to satisfy both debt and equity holders, and it is the discount rate applied to unlevered free cash flow in a DCF because those cash flows are available to all capital providers.
⚠ Common wrong answer: "WACC is the company's borrowing rate — its cost of debt." Why it fails: Debt is only one slice — WACC blends the required returns of ALL capital providers at their market-value weights, and the equity component is usually both the larger weight and the more expensive claim.
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