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To begin answering this question, the weight average cost of capital (WACC) should be defined first. The weighted average cost of capital (WACC) is the average after-tax cost of a companys various capital sources (Folger, 2020). Both internal and external factors affect the weighted average cost of capital (Folger, 2020). The main one that has implications on the weighted average cost of capital is interest rates (Folger, 2020). As the fed makes adjustments to interest rates, it causes changes in the risk-free rate, the theoretical rate of return for an investment that has no risk of financial loss (Folger, 2020). If the federal funds rates increase or decrease, there are affects to the firms WACC (Folger, 2020). This is mainly because the risk-free rate is taken into consideration when calculating the cost of capital (Folger, 2020). The interest rate paid by the firm equals the risk-free rate plus the default premium for the firm (Folger, 2020). When the Fed raises interest rates, the risk-free rate immediately increases (Folger, 2020). There are four main mistakes that should be avoided: never base the cost of debt on the coupon rate on a firms existing debt, when estimating the market risk premium for the CAPM method, never use the historical average return on stocks in conjunction with the current return on T-bonds, never use the current book value capital structure to obtain the weights when estimating the WACC, and always remember that capital components are funds that come from investors (Brigham & Ehrhardt, 2015).