Monday, February 20, 2012

How the Wrong Cost of Capital Can Cost a Company


When discussing the WACC and cost of capital for a specific project, we made sure to stress that a company should adjust the cost of capital for the riskiness of the project if it is different from the risk of the company by using the pure play approach or subjective approach. In this discussion of the hurdle rate (cost of capital for a specific project), it appears that many companies are applying the subjective approach to adjusting the cost of capital, but applying an adjustment factor that is too high. Another important point: The article notes that the WACC for U.S. companies has been in the 7 percent to 9 percent range for the past 8 years. http://www3.cfo.com/article/2012/2/cash-flow_emerging-markets-hurdle-ratesdominos-pizzaweighted-average-cost-of-capital