Cost of capital

Cost of capital is the return a company must generate on the money it has raised, whether through debt or equity, to satisfy the investors and lenders who provided it. When blended across both debt and equity in proportion to how a company is financed, it is often called the weighted average cost of capital, or WACC.

A company creating real value for shareholders should be earning a return on invested capital that exceeds its cost of capital, if it does not, the business is effectively destroying value even if it is technically profitable. This idea is closely related to the discount rate used in a DCF model: when a DCF values the whole company from the free cash flow available to both lenders and shareholders, the WACC itself is the usual discount rate.