Part 2/9:
The concept of the Weighted Average Cost of Capital (WACC) also presents an essential lesson in the investment domain. Businesses are expected to generate projects that exceed their WACC, which includes a comprehensive assessment of the probability of success and potential returns. However, when companies struggle to find viable projects with returns above WACC, they encounter a fundamental dilemma: should they return excess capital to shareholders through dividends or buybacks? Historically, management teams may be hesitant to admit they can't find profitable opportunities, often opting to continuously reinvest instead.