... for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and will create positive net present value for stock owners. These corporate investments should result in an increase in stock prices. These projects are good things! Investments that earn less than the firm's WACC will result in a decrease in stockholder value and should be avoided by the company. The common intuition for using WACC is "To be valuable, a project should return more than what it costs us to raise the necessary financing, i.e. our WACC"3. However, this intuition is wrong, as most of the time, conceptually, the logic is flawed. Practically, it usually gives you a result far off the mark. The purpose of it is ...

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