Introduction
The Weighted Average Cost of Capital (WACC), introduced in Chapter 8 of your Higgins et al. (2023) textbook, is another powerful financial concept. It is one of those magic numbers that makes every organization unique. Each firm has its own WACC, based on its situation and financial choices. This cost can either be a tremendous advantage or a disadvantage, so it is important for company leaders to understand it.
But as the title of this discussion suggests, the issues are extremely complex. Keep in mind that WACC is only a cost from the perspective of the company. It might be better described as a promised return to the company’s investors. The WACC is also the company’s required rate of return. Same number, different perspectives.
So, while it may be generally true that a lower cost of capital is better, that is not always the case. Often, a higher number is better. That fact is probably worthy of some deeper discussion.
Instructions
Read Chapter 8 of Higgins et al. (2023) Analysis for Financial Management, including the appendix on asset beta and adjusted present value.
Conduct some research to identify two examples of real-life companies: One with an unusually low WACC, and another with an unusually high WACC.
With your initial post, briefly describe the two businesses you found and explain why these companies might have intentionally chosen to have such extreme WACCs. What is the benefit of a very low or very high WACC?
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