Why is WACC important for a company?

WACC, or Weighted Average Cost of Capital, is crucial for a company because it represents the average rate of return that investors expect for providing capital to the company, whether that capital comes from equity or debt. This rate serves as a benchmark for evaluating investment decisions; if a company’s projects are expected to generate returns that exceed the WACC, it suggests that those projects will add value to the company and satisfy investors' return expectations. On the contrary, if the returns fall below the WACC, it may indicate that the company is destroying value and not meeting its capital costs.

Understanding WACC allows a business to make informed decisions about financing, investment opportunities, and project evaluation. It emphasizes the cost of funding operations and highlights the risks associated with capital investment, aligning the company's strategic goals with investor expectations. This connection to investor expectations differentiates this concept from others in the list, which do not directly relate to the cost of capital or investment performance.