Term

Main definition

Weighted-Average Cost of Capital

Weighted average is an adjective that refers to a manner to calculate the average for a total amount, where you add the averages for several components with approprite weighting. In this context the adjective sounds intelligent albeit it seems like surplusage to us.

The company must be able to pay the cost of capital from its profits, so one should consider cost of capital as equal to a hypothetical minimum rate of profitability that would be sustainable or the minimum profit that the company needs to earn in order to make its necessary payments to investors. Businesses that do not return the minimum profitability to sustain their capital structures can go into default, which is a desperate situation, unless and until they receive new investments or higher profits.