What is 'Composite Cost Of Capital'
Composite cost of capital is a company's cost to finance its business, determined by, and also referred to as "weighted average cost of capital" or WACC. The calculation involves multiplying the cost of each capital component by its proportional weight and taking the sum of the results. A company's debt and equity, or its capital structure, typically includes common stock, preferred stock, bonds and any other longterm debt. A high composite cost of capital, indicates that a company has high borrowing costs; a low composite cost of capital implies lower borrowing costs.
BREAKING DOWN 'Composite Cost Of Capital'
To help understand composite cost of capital, think of a company as a pool of money from two separate sources: debt and equity. Proceeds earned through business operations are not considered a third source because, after a company pays off debt, the company retains any leftover money that is not returned to shareholders (in the form of dividends) on behalf of those shareholders.
A company's management uses the company's composite cost of capital in internal decision making. For example, it might use it to help decide whether the company could profitably finance a new project. Investors may use a company's composite cost of capital as one of several factors in deciding whether to buy the company's stock. While the cost of issuing debt is fairly straightforward, the cost of issuing stock has more variables. A company with a relatively low WACC may be better positioned to grow and expand, potentially rewarding shareholders.
How Investors Use Composite Cost of Capital
Securities analysts frequently use WACC when assessing the value of investments. For example, in discounted cash flow analysis, the WACC can be applied as the discount rate for future cash flows in order to derive a business's net present value. WACC may also be used as a hurdle rate against which to gauge ROIC performance. WACC is also essential in order to perform economic value added (EVA) calculations.
While composite cost of capital is important, the average investor would find that calculating WACC is a complicated process requiring detailed company information. Nonetheless, understanding WACC can help investors understand its significance when they see it in brokerage analysts' reports.
Because certain elements of the WACC formula, like cost of equity, are not consistent values, various parties may report them differently for different reasons. As such, while WACC can often help lend valuable insight into a company, one should always use it along with other metrics when determining whether or not to invest in a company.

Financing
Financial institutions and banks are in the business of providing ... 
Economic Spread
Economic spread is a way to assess if a company is making money ... 
Weighted Average
Weighted average is an average in which each observation in the ... 
Required Rate Of Return  RRR
The required rate of return is the minimum return an investor ... 
Discounted Cash Flow (DCF)
Discounted cash flow (DCF) is a valuation method used to estimate ... 
Corporate Capital
Corporate capital refers to the assets a business has available ...

Investing
Investors Need A Good WACC
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality. 
Investing
Methods used in valuing private companies
There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm. 
Investing
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock. 
Investing
Discounted Cash Flow Analysis
Find out how analysts determine the fair value of a company with this stepbystep tutorial and learn how to evaluate an investment's attractiveness for yourself. 
Investing
Home Depot's 6 Key Financial Ratios (HD)
Learn about important financial ratios used to determine the performance of retailer Home Depot; these give a quick snapshot of the company's profitability. 
Trading
Find Quality Investments With ROIC
Return on invested capital is a great way to measure the true value produced by a company. Learn to use the ROIC metric and increase your chances of finding successful investments. 
Investing
Evaluating a Company's Capital Structure
Learn to use the composition of debt and equity to evaluate balance sheet strength. 
Investing
The Optimal Use Of Financial Leverage In A Corporate Capital Structure
The amount of debt and equity that makes up a company's capital structure has many risk and return implications.

What is the formula for calculating weighted average cost of capital (WACC)?
Weighted average cost of capital (WACC) is the average aftertax cost of a company's various capital sources used to finance ... Read Answer >> 
What's the difference between weighted average cost of capital (WACC) and internal ...
Both weighted average cost of capital (WACC) and internal rate of return (IRR) are great measures for assessing value, but ... Read Answer >> 
What are the benefits and shortfalls of the HerfindahlHirschman Index?
Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >> 
determine the proper weights of costs of capital?
Learn how to calculate the weights of the different costs of capital, as well as how this is used to determine the weighted ... Read Answer >> 
What is the difference between the cost of capital and the discount rate?
Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ... Read Answer >> 
How do I discount Free Cash Flow to the Firm (FCFF)?
Find out how to perform (relatively) simple estimates of discounted future cash flow to the firm using the singlestage WACC ... Read Answer >>