say something substantive/ ask a thoughtful question about the statement "Hi Class,

The average rate concept of capital is the weighted average cost of capital or WACC. WACC is also referred to as the "minimum acceptable return on investment," (Team 365 Finance, 2025) and more simply the WACC is the average cost a firm pays to use its stockholders' capital investments. The formula for finding the WACC is , where E = the market value of the firms equity, D = market value of the firms debt, V = the equity and debt, Re = the cost of equity, Rd = cost of debt, and Tc = the corporate tax rate.

The required rate of return on a stock investment by an individual is the minimum return the individual requires to rationalize the risk of the investment. Every individual must assess what their own risk tolerance level is when considering investing in a stock. RRR does not include inflationary pressure that must be understood, RRR is calculated: , E(R) = the required rate of return (expected), RFR = the risk free rate, _stock = the beta coefficient of the stock, R_market = the return expected from the market, - RFR = the market risk premium. The RRR should be equal to the cost of equity for the firm being considered.

In comparison the cost of capital concept is typically only used by an investment firm, but as an individual investor this formula is important because if the risk increases, they will be required to pay a higher rate of return to attract investment capital from the individual. The formula for the cost of capital is the same as calculating a company's WACC and the formula is mentioned above.

A very risky investment project requires a different set of modeling that can withstand adjustments for risk. Capital budgeting modeling using an elevated discount rate can be implemented, for example if a firms WACC is 5%, the "risky" investment evaluation could use 9% in the formulation for the WACC. Also, the Monte Carlo Simulation should be considered when an investment opportunity carries more risk. This model is considered superior to WACC, or CAPM, because it provides probability distribution of NPV (net present value). This is a way for the individual or an investment firm to understand a firm's risk profile better.

Thanks,

John.

Reference

Team 365 Finance, (2025). Understanding wacc (weighted average cost of capital). Published in april 2025, retrieved october 2025 from: https://www.365finance.co.uk/guides/understanding-wacc-weighted-average-cost-of-capital/#:~:text=Why%20WACC%20is%20Important,they%20can%20expect%20to%20seeLinks to an external site.."