The rate a company pays to finance its assets. The weighted average cost of capital (WACC) rate tells a firm how much interest it has to pay for every dollar of its capital. In this sense, it takes into account the costs of the two components of capital i.e., debt and equity, each of which is weighted by its respective contribution to capital. In other words, all sources of capital such as common stock, preferred stock, bonds, and long-term debt are included in WACC calculation. Mathematically, WACC is calculated using the following formula:

WACC = (E/ V) * Re + (D/ V) * Rd * (1-Tc)

Where: E: equity, D: debt, V= E+ D, E/ V: percentage of equity to total value of a firm, D/ V: percentage of debt to total value of a firm, Re: cost of equity, Rd: cost of debt, Tc: corporate tax rate.

Firms use WACC to discount cash flows in order to calculate the net present value of a given project, whether for organic expansion or external expansion (mergers). As such, WACC is basically a discount rate that is applied to cash flows with similar risk to that of the overall company.