Nice example you brought! You are a good teacher! So wacc is more like a reality check it a business goes to the value-destroying side or value-creating!! Brain is working now 🤣
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Yea once WACC starts getting crazy "high" the investors require outrageous returns from shareholders and/or debt holders.
There are cases where a "high" WACC is not necessarily bad but it's not where a company wants to sit longterm.
Aren't the shareholders the investors? It would make sense that investors/shareholders would look for higher returns from the board and principals in the company when WACC is higher, if that's what you meant.
Shareholders would typically be equity investors and bond holders would typically debt investors 🙂
I am presented with an image of stockholders and bondholders duking it out for the lion's share of the net. 😀
I imagine they have more financial power, as demonstrated by their lower appetite for risk and staking claims for specified returns.
In the US anyways, we follow the Absolute Priority Rule in bankruptcy cases.
Secured creditors are payed first in bankruptcy, then unsecured creditors, then equity holders.
Interestingly enough, GM today is technically a different company than the one that went bankrupt in 2009. Even unsecured borrowers lost a lot of money in old GM and equity holders got wiped out.
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