What is a good WACC of a company in Finance?
What is a good WACC
There is no specific WACC that is considered "good" as it varies depending on the company and industry. Generally, a lower WACC indicates lower risk and a higher WACC indicates higher risk. A good WACC is one that accurately reflects the company's cost of capital and is used consistently in decision-making processes.
Understand WACC with an example
Let's say Company A operates in the software industry and has a WACC of 8%. Company B operates in the oil and gas industry and has a WACC of 12%.
Company A's lower WACC of 8% suggests that its investments are less risky compared to
Company B's investments with a higher WACC of 12%. This is because Company A's operations are in the software industry, which is known for having lower risk compared to the oil and gas industry in which Company B operates.
However, it's important to note that the WACC alone does not determine if an investment is good or not. It's just one of the factors used in the decision-making process. Companies should evaluate each investment opportunity on a case-by-case basis, taking into consideration other factors such as potential returns, market trends, and project risks, before making a decision.