Introducing MWACC(tm) the correct hurdle rate underpinning value creation in the real world. This article explains why corporates should be using MWACC and not WACC when evaluating the value of their investment opportunities.
MWACC is the link between strategy and finance: it is simply a function of the size of the strategy premium investors have assigned to the corporate and the amount of capital the corporate has available to invest in achieving it.
Unlike WACC which is a statistical concept reliant upon the strong form efficient market hypothesis assumptions, MWACC reflects real world influences that the corporate faces: those of restricted capital and the potentially boundless arbitrage opportunities that strategic positioning in the real economy can create.
WACC is the return investors in a corporate should demand. It is the correct cost of capital for a tradeable financial stock in an efficient and deep market.
MWACC is the return the corporate must demand from its internal business units in order to satisfy the strategy premium placed upon it by its shareholders. Where the strategy premia is deemed to by positive MWACC is always higher than WACC.
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