Financial Terms Glossary

W & X

Weighted Average Cost Of Capital (WACC)

WACC, or Weighted Average Cost of Capital, is a financial metric used to measure the cost of capital to a firm. It is most usually used to provide a discount rate for a financed project, because the cost of financing the capital is a fairly logical price tag to put on the investment. WACC is used to determine the discount rate used in a DCF valuation model.

The two main sources a company has to raise money are equity and debt. WACC is the average of the costs of these two sources of finance, and gives each one the appropriate weighting.

Using a weighted average cost of capital allows the firm to calculate the exact cost of financing any project.

Y & Z

Yield

Yield simply means the return on an investment, usually the interest paid on a fixed income asset. It is expressed as a percentage and the calculation is simply return divided by cost.

Yield measurements are most commonly associated with bonds and there are 3 main kinds of yield to consider:

  • Current Rate - the rate of interest relative to the current bond price
  • Coupon Rate - the interest raid paid at the time of issue
  • Yield to Maturity - the return an investor can expect over the remaining life of the bond