The weighted average cost of capital (WACC) or the average rate of return that is required by all of a company’s creditors and investors. There are typically four sources that provide financing (debt, preferred stock, common stock, and retained earnings), and each of which will most likely charge its own rate. Therefore, the blended rate is calculated in order for a company to be aware of its average cost of capital so that it enables it to determine the threshold for future investments or projects.

For example, if a given company calculated its WACC at 8.5%, it would have to be able to earn at least 8.5% to justify any new investment or project. If the expected return of a new project is less than 8.5%, the company would not use its funds until a more profitable project is spotted.