What does the Weighted Average Cost of Capital (WACC) represent?

The Weighted Average Cost of Capital (WACC) represents the overall cost of a company's capital from all sources, which includes both equity and debt. It reflects the average rate that a company is expected to pay to finance its assets, weighted according to the proportion of each component in its capital structure.

Calculating WACC involves multiplying the cost of each source of capital by its respective weight in the overall capital structure and summing the results. This is crucial for companies as it helps in assessing investment opportunities and profitability. If an investment has an expected return above WACC, it is typically considered a good investment since it suggests that the returns exceed the costs of financing it.

Providing the rationale for the other options: while the average return expected by shareholders is part of the equity component of WACC, it does not encompass the full picture of capital costs. The amount of profit generated from investments is related to returns but does not directly define WACC. Lastly, the valuation of a company's stock price reflects market perceptions and investors' expectations but does not represent the cost of financing inherent in WACC.