How the decision of the federal reserve bank to raise rates

Reference no: EM133731444

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Question: Explain how the decision of the Federal Reserve Bank (Fed) to raise interest rates would be expected to affect each component of the weighted average cost of capital (WACC). What mistakes are commonly made when estimating the WACC, and how do these mistakes arise?

Some common mistakes that can occur when estimating the WACC are using outdated or inappropriate methods like the Capital Asset Pricing Model (CAPM) without adjusting for market conditions or company-specific risk. Another common mistake is not adjusting the equity risk premium for changing market conditions or for the specific risk profile of the company. Failing to adjust the inputs for changes in economic conditions, industry risks, or company-specific factors and using outdated financial or market data can lead to these common mistakes.

Reference no: EM133731444

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