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When the Federal Reserve Bank raises interest rates, it immediately effects the weighted average cost of capital because it also increased the risk-free interest rate. The risk-free interest rate is used to calculate the weighted average cost of capital, and if it increases it also increases the weighted average cost of capital (Folger, 2020). If the weighted average cost of capital increases, it could also increase the default risk. Which could cause the default premiums to increase and additionally increase the interest rate used for the weighted average cost of capital. Shorter terms to maturity, on a firms debt, see higher effects of the increased rates, but the longer the time of maturity the longer it takes to see the highest effect (Folger, 2020). Good economical conditions allows the default risk to be reduced, which also reduces the weighted average cost of capital, but it also may cause the Federal Reserve Bank to increase interest rates (Folger, 2020).

Mistakes could be made while estimating the weighted average cost of capital because each method of calculation uses a form of estimation. The numbers are not exact, which causes a variation of estimates. Another reason for a mistake is that the calculation uses an expected cost of return, which does not use any history of returns for the company (Finance Train, 2013). Also, the density of the companys capital structure also makes the weighted average cost of capital more challenging to estimate. These different mistakes, or methods, are the reason that two different analyst will never come up with the same value for the weighted average cost of capital. (Finance Train, 2013).