What is WACC?

WACC is like the average price you pay to borrow money from all your friends when you're running a lemonade stand.

Imagine you have a lemonade stand and need more lemons to make more lemonade. You ask some friends for loans, some give you money in exchange for a promise to share the profits, others let you use their extra lemons in return for a little of your lemonade later. Each friend has different requirements for how much they want back.

WACC stands for Weighted Average Cost of Capital, and it's like figuring out the average cost of all those loans from your friends, some might be cheaper, others more expensive, but you take an average based on how big each loan is.

Let’s say:

• One friend lends you $10 for 20% of the profits (that's like a cost of equity).
• Another gives you $5 worth of lemons in exchange for 10% of your lemonade later (like a cost of debt).

WACC helps you figure out how much you're paying overall, so you know if it's worth borrowing more money or not.

It’s like knowing the average price of all your lemon loans, helping you decide if your stand is making enough profit to be worth it.