The Weighted Average Cost of Capital and Its Universality in Crisis Times: Evidence from the Energy Sector

Zbysław Dobrowolski (), Grzegorz Drozdowski, Mirela Panait and Simona Andreea Apostu
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Zbysław Dobrowolski: Institute of Public Affairs, Jagiellonian University, 30-348 Kraków, Poland
Grzegorz Drozdowski: Department of Economics and Finance, Jan Kochanowski University in Kielce, 25-369 Kielce, Poland
Mirela Panait: Department of Cybernetics, Economic Informatics, Finance and Accounting, Petroleum-Gas University of Ploiesti, 100680 Ploiesti, Romania
Simona Andreea Apostu: Department of Statistics and Econometrics, Bucharest University of Economic Studies, 010552 Bucharest, Romania

Energies, 2022, vol. 15, issue 18, 1-15

Abstract: Recent economic anomalies, including the unprecedented lockdown generated by the COVID-19 crisis, have demonstrated that the weighted average cost of capital (WACC) remains an actual topic in the financial literature and in practice. Companies operate in an increasingly volatile environment, due to twin transitions and interlinked crises, and so they must have specific tools for measuring risk and profitability, in order to enable them to have a sound financial policy. Based on the earlier results obtained by Modigliani and Miller (1963), Harris and Pringle (1985), and Farber, Gillet, and Szafarz (2006), this study shows the relationship between WACC and interest rate. It offers a modified WACC formula that considers unstable market circumstances. The new redefined WACC can be a valuable tool in business planning for companies from different fields. The companies in the energy sector are very interested in the topic of WACC, considering not only the complex nature of the investments made and the long-term nature of investment recovery but also the multiple risks that have an impact on their activity and that can be found in different economic, social, and geopolitical spheres.

Keywords: WACC; tax shield; return on equity; energy company; cost of debt; interest rate (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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