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 decision tool rather than a formula that gives a false sense of certainty.

See also Capex: definition, 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 different 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

In 2026, WACC remains a very useful pedagogical and decision-making tool for linking financing, risk and profitability. Its strength lies in structuring a disciplined conversation, not in producing a perfect answer. Used pragmatically, it helps management compare projects more intelligently and read the cost of capital without overcomplicating the analysis.

Want to use cost of capital pragmatically for a project or a valuation? Our firm can help build robust and readable assumptions. Book an appointment with an expert

(Official sources: Banque de France on business financing and Bpifrance Creation on financial project assessment)