If we think that capital providers have invested in a company, then the WACC represents the return being paid out to them capital providers Or alternatively it's the cost to the company of having that invested Of borrowing money from debtholders or shareholders That means, your WACC has to reflect the business risk Capital providers have invested in the business, they are thus taking a risk by investing in you That means the WACC has to include the risk of your company Next up, we have to include all capital providers in our weighted average cost of capital The classics are debt and equity But we might also want to include preference shareholders We might want to include capital leaseholders A shareholder may have bought some shares for 100. And they're going to get a return of 10 That would thus give them a return of 10% However, those shares that they bought for a 100. That may have been 10-20 years ago. Those shares may now be worth 200 So that 10% return is now only a 5% return We have to use current market values to work out the current returns that capital providers are requiring Last up, we have to the calculate the WACC consistently with the free cash flow construction If I look at all of the capital providers into my WACC Let's say that includes ordinary shareholders, preference shareholders and debt holders Well that means my free cash flow must not include, cash flows going out to shareholders (it must not include dividends) It must not include cash flows going out to preference shareholders (so preference dividends) And lastly my free cash flow must not include cash flows going out to debtholders It must not include interest or maybe repayment of debt (any other cash flows you can think of) So remember, our free cash flow must be consistent with the capital providers included in the WACC