What is the primary difference between the Capital Asset Pricing Model (CAPM) and the Weighted Average Cost of Capital (WACC)?

The primary difference between the Capital Asset Pricing Model (CAPM) and the Weighted Average Cost of Capital (WACC) lies in their respective focuses on costs associated with capital. CAPM specifically estimates the cost of equity by assessing the expected return on equity based on the risk-free rate, the equity beta (which measures the asset's risk relative to the market), and the expected market return. This model helps investors understand compensation for both the time value of money and the additional risk taken by investing in a risky asset compared to a risk-free asset.

On the other hand, WACC provides a broader perspective as it represents the average rate of return that a company is expected to pay to finance its assets, thus encompassing both equity and debt costs. WACC is calculated by taking the percentage of each capital component (equity and debt) in the overall capital structure, multiplied by its associated cost, and then summing these values together.

This distinction is fundamental in finance as CAPM is primarily a tool for evaluating the cost of equity, whereas WACC helps in understanding the overall cost required for the entire capital structure, making option C the correct answer.