1.. Why don’t firms generally use both short- and long-run weighted average costs of capital? As U.S. financial markets experienced and recovered from the 2008 financial crisis and 2009 “great recession,” firms struggled to keep track of their weighted average cost of capital. The individual component costs were moving rapidly in response to the financial market turmoil.

Volatile financial markets can make otherwise manageable cost-of-capital calculations exceedingly complex and inherently error prone, possibly wreaking havoc with investment decisions. If a firm underestimates its cost of capital, it risks making investments that are not economically justified, and if a firm overestimates its financing costs, it risks foregoing value-maximizing investments.