As discussed in Section 9.2.4, WACC is popular and routinely used in a variety of capital budgeting situations. It seems, though, that the factor is not without controversy. What are some of the controversies and what cautions would you offer to avoid mis-use?

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9.2.4 Weighted average cost of capital, (WACC) Investment projects are frequently funded through some combination of equity (retained earnings, stock) and debt (bonds, credit lines). Although govern- ment policy can affect MARR through the cost of capital charged to banks, it is safe to say that federal monetary policy is generally of secondary concern to most engineering managers. If all the capital needed by a company were derived from stockholders, then the required rate of return on equity would dominate the MARR decision, but that is not typical. However, with capital markets still quite conservative post-2008, capital projects with an investment as small as P = $1 million might be financed from a combination of debt, eq- uity, and economic development tax incentives. The weighted average cost of capital (WACC) is obtained by "weighting" the various components of capital. In the most basic form, we could calculate a weighted average as simply: