WACC (Weighted Average Cost of Capital) is the average rate a company expects to pay to finance its assets, weighted by the proportion of debt and equity in its capital structure. It's important because it represents the minimum return a company must earn on its investments to satisfy all capital providers (creditors and shareholders). Companies use WACC as a hurdle rate for investment decisions, ensuring they only pursue projects that create value.

The market value of equity equals the current stock price multiplied by the total number of outstanding shares (market capitalization). For public companies, this information is readily available on financial websites. The market value of debt should reflect the current market price of outstanding bonds and loans. For private companies or when market prices aren't available, book values from the balance sheet can serve as approximations, though market values are always preferred for accuracy.

There's no universal "good" WACC—it varies by industry, company size, and risk profile. Generally, established companies in stable industries have WACC between 6-10%, while growth companies or those in volatile sectors might have WACC of 12-20% or higher. Lower WACC is generally better as it means cheaper capital, but extremely low WACC might indicate limited growth opportunities. The key is comparing WACC to investment returns: projects should generate returns exceeding WACC to create value.

Interest payments on debt are tax-deductible expenses, creating a "tax shield" that reduces the effective cost of debt. When a company pays interest, it reduces taxable income, resulting in lower tax payments. The (1 - T) adjustment reflects this tax benefit. For example, with a 20.6% tax rate (Sweden 2025), if the pre-tax cost of debt is 5%, the after-tax cost is 5% × (1 - 0.206) = 3.97%. This makes debt financing more attractive than it initially appears.

WACC should be recalculated whenever there are significant changes in: (1) capital structure (major debt issuance or equity raise), (2) market conditions (interest rate changes, market volatility), (3) company risk profile (credit rating changes), or (4) tax rates. For active companies, quarterly or semi-annual recalculation is advisable. For strategic planning and major investment decisions, always calculate WACC using current market data to ensure accuracy.

Cost of capital is a broader term that can refer to the cost of any individual capital source (cost of equity, cost of debt, cost of preferred stock). WACC specifically refers to the weighted average of all these capital costs, reflecting the company's overall financing mix. WACC provides a single rate that accounts for the proportion of each capital source, making it more practical for investment evaluation. Think of WACC as the blended, comprehensive version of cost of capital.

Beta measures a stock's volatility relative to the overall market. In the CAPM formula for cost of equity, a higher beta increases the cost of equity because investors demand higher returns for taking on more risk. If beta > 1, the stock is more volatile than the market; if beta < 1, it's less volatile. Since cost of equity is a component of WACC, a higher beta ultimately increases WACC. Technology and growth companies typically have higher betas (and higher WACC) than utility or consumer staples companies.

In practical terms, WACC cannot be negative. Both cost of equity and after-tax cost of debt are positive values representing required returns for investors and lenders. Even in negative interest rate environments, the overall WACC remains positive because equity holders always demand positive returns to compensate for risk. If your calculation yields a negative WACC, there's likely an error in your inputs or methodology. Double-check that you're using correct formulas, positive values, and proper weightings.

Adjusted working capital measures operational efficiency by calculating accounts receivable plus inventory minus accounts payable and accrued liabilities, excluding cash and short-term debt. While adjusted working capital doesn't directly appear in the WACC formula, it's important for understanding a company's operational efficiency and cash conversion cycle. Companies with efficient working capital management may have lower financing needs, potentially affecting their capital structure and, consequently, their WACC. Strong working capital management can reduce the need for expensive short-term financing.

Yes, using project-specific WACC is often more accurate than using a company-wide WACC. Projects in different business segments or geographic regions may have different risk profiles. For example, a stable utility company expanding into renewable energy technology should use a higher WACC for the tech project due to increased risk. This approach, called "divisional WACC" or "project-specific WACC," involves adjusting beta and potentially debt ratios to reflect the specific project's characteristics. However, company-wide WACC remains useful for overall performance evaluation.