What is the primary use of WACC?

The primary use of WACC, or Weighted Average Cost of Capital, lies in its role in discounting cash flows in a Discounted Cash Flow (DCF) model. WACC represents the average rate that a company is expected to pay its security holders to finance its assets. In a DCF analysis, future cash flows are projected, and to determine their present value, they must be discounted back to the present. WACC serves as this discount rate because it reflects the cost of capital from all sources, including equity and debt, weighted according to their proportion in the company's capital structure.

Using WACC allows investors and analysts to assess the value of expected future cash flows while taking into account the risk of those cash flows relative to the company's overall risk profile. It helps ensure that the projected returns on investments are at least equal to the cost of financing those investments. This makes it a crucial tool for investment decisions, corporate finance, and valuation of companies, particularly in capital budgeting processes and mergers and acquisitions.

In contrast, the other options do not directly align with the primary application of WACC; assessing company profitability, evaluating market share, or calculating operating expenses involve different metrics and analyses that do not utilize WACC as their primary measure.