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What is the WACC?

Published on 18/08/2022
Contributor(s): Harold Grosfils

The Wacc or weighted average cost of capital. This concept comes after the article on the DCF method, which we invite you to review. The Wacc  is the rate that is used to discount all future cash flows during a valuation. What is the intuition behind this rate, which every investor should be able to estimate?

The Wacc is based on the principle of arbitrage. An individual with money to invest will be faced with a multitude of possible investments, all giving a different level of risk and return. All other things being equal, faced with a similar level of risk, the investor will choose the one that will give him the highest level of return. This return in line with a given level of risk is reflected by the Wacc. In other words, it is the annual rate of return required by an investor for a given level of risk and time horizon.

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