The company I selected for this exercise is Chevron Corporation in
the Energy Sector. As of today 12/7/8, Chevron’s weighted average
cost of capital (WACC) is 10.55% according to Focus Guru (see
citation below).
Chevron (No. 16 on the Fortune 500) reported second quarter
earnings of $11.6 billion. On June 8, Chevron’s stock price reached an
all-time high of $182.40 as national average for gas prices hit an all-
time high at $5 per gallon. The company’s WACC has fluctuated over
the past couple of quarters as a direct result of its stock prices
(Estrada, 2022).
There are many factors that can impact Chevron’s WACC, including,
the federal reserve interest rates and the current economic
conditions. As the Federal Reserve makes adjustments to interest
rates, it impacts the risk-free rate or the theoretical rate of return for
an investment that has zero risk of financial loss. An increase or
decrease in the federal funds affects a company’s WACC. The hike in
the Federal Reserve interest rates have caused an increase in
Chevron’s WACC cover the past year or so (Estrada, 2022)
Another factor that has caused an increase in Chevron’s WACC is the
challenging economic conditions over the past 2 years. The response
of WACC to economic conditions is that bad economic conditions
increase risk of default, which increases the WACC (Folger, 2022).
Citations
Estrada, S. (2022, October 7). As Chevron's stock hovers near its all-
time high, the CFO is trying to 'win back investors to energy'. Fortune.
Retrieved December 7, 2022, from
https://fortune.com/2022/10/07/chevron-stock-all-time-high-cfo-
investors-energy/
Folger, J. (2022, September 1). Interest rates and other factors that
affect WACC. Investopedia. Retrieved December 7, 2022, from
https://www.investopedia.com/ask/answers/070114/how-do-
interest-rates-affect-weighted-average-cost-capital-wacc-
calculation.asp#:~:text=When%20the%20Fed%20hikes%20interest,e
conomic%20conditions%2C%20and%20market%20conditions.
