Explain weighted average cost of capital, also discuss CAPM in this connection. 

Weighted average cost of capital (WACC) is used by analysts and investors to assess an investor's returns on an investment in a company. As the majority of businesses run on borrowed funds, the cost of capital becomes an important parameter in assessing a firm’s potential for net profitability. WACC measures a company’s cost to borrow money, where the WACC formula uses both the company’s debt and equity in its calculation.

Key Takeaways

• The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.
• All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.
• WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and then adding the products together to determine the total.
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