What is the primary purpose of the Weighted Average Cost of Capital (WACC)?

The primary purpose of the Weighted Average Cost of Capital (WACC) is to determine the discount rate for Discounted Cash Flow (DCF) analysis. WACC represents the average rate of return that a company is expected to pay to its security holders to finance its assets. It takes into account the cost of equity and the cost of debt, weighted by their respective proportions in the company's capital structure.

In a DCF model, future cash flows are discounted back to present value using WACC as the discount rate, which reflects the opportunity cost of investing in that particular business versus investing in other ventures with comparable risk. Therefore, by using WACC in DCF analysis, analysts can estimate the fair value of a company or project based on its projected cash flows.

While the other options touch upon various aspects of financial analysis, they do not define the primary role of WACC. Growth rate calculations, risk assessment, and asset profitability measurements are important financial metrics but are distinct from the function of WACC in valuation modeling. WACC specifically serves as the hurdle rate that is critical for effectively evaluating and comparing investment opportunities.