A firm's WACC is the overall required ret

urn for a firm.

The weighted average cost of capital (WACC) represents a firm's average cost of capital from all
sources, including common stock, preferred stock, bonds, and other forms of debt.

WACC determine how much interest a company owes for each Rupee it finances.

A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky
because investors will demand greater returns. 

In most cases, a lower WACC indicates a healthy business that’s able to attract investors at a lower
cost. By contrast, a higher WACC usually coincides with businesses that are seen as riskier and need
to compensate investors with higher returns.

Practical example –

In 2021, the WACC of NCC, KNR, IRB, HCC was 17.8%, 13.54%, 5.3%, 5,3% respectively.

What does this indicate?

To break it down,

NCC must pay its investors an average of ₹0.178 in return for every ₹1 invested.

KNR must pay its investors an average of ₹0.135 in return for every ₹1 invested.

IRB must pay its investors an average of ₹0.053 in return for every ₹1 invested.

HCC must pay its investors an average of ₹0.053 in return for every ₹1 invested.

Theres a negative relation between WACC and cost of debt. And when we see the cost of equity,
WACC increases when cost of equity increases. There's a positive relation between WACC and cost
of equity.

So, if the company wants to decrease its wacc it must go for increase in debt but to a certain limit so
that it can be less riskier at the same time.