Cost of capital, capital structure, and capital budgeting analysis
The Weighted Average Cost of Capital (WACC) is an important tool for capital budgeting and it can be used to determine the rate of return required for a project to perform better than the cost of financing it. WACC takes into account any form of debt or equity finance that may be involved in the proposed project, as well as their respective costs. If the projected return on investment for a project is greater than its WACC, then it should be accepted by management. However, if the return on investment is lower than its WACC, then it should not be accepted and further analysis should take place in order to reduce associated costs and increase expected returns.