What does the acronym WACC stand for, and what is it used for in valuation?

• A. Weighted Average Cost of Capital; the discount rate for unlevered DCF
• B. Weighed Average Cost of Capital; the discount rate for levered DCF
• C. World Average Cost of Capital; a benchmark for tax planning
• D. Withstand and Convert Capital; a risk metric

Answer: (A)

WACC stands for the blended, after‑tax cost of funding a firm through both debt and equity, weighted by each component’s share in the capital structure. In valuation, it is used as the discount rate for unlevered free cash flows because these cash flows are available to all capital providers (debt and equity) before debt payments, so the rate should reflect the overall cost of financing the firm. Using WACC to discount unlevered cash flows yields the enterprise value. For levered cash flows, the discount rate is typically the cost of equity, since debt payments have already been accounted for. The other options don’t fit: one option uses a misspelled term and ties WACC to levered cash flows, while the rest describe unrelated concepts.