WACC: what is the cost of capital really used for?

Updated March 2026 - WACC, or the weighted average cost of capital, represents the overall cost of the financial resources used by a company, combining debt and equity. It is a useful concept for thinking about an investment, a valuation or a financing structure, provided it remains a décision tool rather than a formula that gives a false sense of certainty.

See also Capex: définition, calculation and challenges for SMEs, financial performance and funding plan.

At its core, WACC helps answer a simple question: does the expected return of a project compensate sufficiently for the cost of the capital committed to it?

That is why it is useful for:

• investment appraisal;
• business valuation work;
• comparison of financing scenarios;
• assessing whether value is being created or destroyed.

WACC forces the company to connect topics that are often analysed separately:

• the financing mix;
• the perceived level of risk;
• the return expected from the project or the business.

That makes it particularly helpful when management has to compare several opportunities that all look attractive in isolation but do not carry the same financing profile or the same uncertainty.

In an SME context, WACC is always partly an approximation. It should guide judgement, not replace it. The trap is to believe that a very precise figure automatically means the underlying assumptions are sound.

Hayot Expertise insight: if your assumptions on growth, margins or risk are fragile, an ultra-precise WACC only creates an illusion of certainty. The quality of the scenario usually matters more than the second decimal place.

A practical reading of WACC requires understanding:

• the cost of debt;
• the cost of equity;
• the relative weight of each funding source;
• the tax effect of debt where relevant.

Even a fairly simple model becomes more useful once those components are linked back to the real financing conditions of the company instead of being copied from a theoretical template.

The most common errors are:

• using market assumptions that have little to do with the company being analysed;
• treating WACC as fixed even when the financing structure changes;
• comparing projects with very différent risk levels using the same discount logic;
• debating the formula while the business assumptions remain weak.

In practice, WACC is only as good as the operational scenario underneath it.

CTA : Link your investment choices to cost-of-capital logic

WACC matters when it is used to compare real choices: whether to launch an investment, compare two projects, challenge an acquisition price or test whether leverage remains sustainable. It is not a score to admire in isolation. It answers a practical question: does the expected return genuinely cover the risk and the cost of financing?

For an SME, WACC is mainly useful to:

• set a minimum return threshold for an investment;
• challenge a valuation or a buyer's price range;
• arbitrate between self-financing, debt and equity.

What a serious calculation should include

A useful WACC relies on coherent assumptions:

• an after-tax cost of debt based on realistic financing conditions;
• a cost of equity consistent with sector risk and company size;
• a target capital structure rather than a temporary balance-sheet snapshot;
• a clear distinction between operating assets and non-operating items.

The classic mistake is false précision. If the inputs are shaky, a WACC quoted to two decimals is less helpful than a realistic range.

WACC becomes dangerous when the same rate is applied to every project regardless of risk, duration or capital intensity. A stable recurring activity and a risky diversification plan should not automatically share one benchmark.

Other fréquent pitfalls include:

• using historical debt costs that no longer reflect market conditions;
• ignoring working-capital needs and extra cash requirements;
• confusing accounting profit with value création;
• applying generic market-risk assumptions without adjusting for size and liquidity.