Weighted average cost of capital (WACC)

What it means

The blended required return on a company’s capital, weighting each source by its share of the total at market value.

The exam angle

Use market weights and target weights, not book values. The tax shield applies to debt only, which is why debt looks cheap before considering the distress it brings.

Where it appears in the syllabus

• Corporate FinanceCFA Level I · exam weight 6–9% · Governance, working capital, capital allocation, capital structure.
• Corporate FinanceCFA Level II · exam weight 5–10% · Dividends and buybacks, ESG, advanced cost of capital, restructuring.
• EquitiesCFA Level I · exam weight 11–14% · Market organisation, indexes, industry analysis, dividend models.

Related terms

• Agency problemThe conflict that arises when managers act in their own interest rather than that of the owners who employ them.
• Capital structureThe mix of debt and equity a company uses to fund itself.
• Corporate governanceThe system of controls by which a company is directed and held accountable to its stakeholders.
• Cost of equityThe return equity holders require for bearing the residual risk of the business.
• Dividend policyHow a company decides to return cash to shareholders, and in what form.
• Pecking order theoryThe observation that firms prefer internal funds first, then debt, and issue equity last.