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Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) is a financial metric used to evaluate investment opportunities and help leaders make informed decisions about capital allocation. By using WACC in the valuation process, companies can better understand the value of their intangible assets. One way WACC can determine the value of assets is by discounting the future cash flows generated by these assets. For example, consider a pharmaceutical company with valuable patents. By estimating the future cash flows generated from the sales of these patented drugs and discounting them at the company’s WACC, management can learn the present value of the patents. Because technology giants like Google and Apple heavily rely on their intellectual property portfolios, WACC can help allocate resources efficiently and maximise shareholder value.