Which of the following best describes the WACC formula?

The WACC formula, or Weighted Average Cost of Capital, is best described as the weighted costs of various sources of capital. This definition captures the essence of WACC, as it reflects the average rate that a company is expected to pay to finance its assets while taking into account the relative proportions of debt and equity in its capital structure.

WACC incorporates the cost of equity, which is the return required by equity investors, and the after-tax cost of debt, which reflects the interest expense on debt adjusted for the tax shield advantage that debt provides. This blending of costs is essential for companies to assess investment opportunities and ensure they are generating returns that exceed their overall cost of capital.

By using the weights based on the market value of equity and debt, WACC provides a holistic view of a firm's financing costs, making it a critical tool for decision-making in finance and investment analysis.