Weighted Average Cost of Capital

WACC is the hurdle rate: capital invested at a return below it destroys value regardless of how large the reported profit is, which is why comparing ROIC with WACC is the central test of capital allocation. Debt is cheaper than equity both because lenders bear less risk and because interest is tax-deductible, which is what the (1 - tax rate) term captures — but that shield is worthless to a company with no taxable profit. Weights must use market values, not book values, or the equity component is badly understated. Adding debt lowers WACC only up to the point where rising distress risk pushes both costs up.