Weighted average cost of capital

So for example, the report notes that there are five key components that impact the LCOE.

There's the upfront capital cost or CapEx, the ongoing operating costs, OpEx, the cost of financing, the WACC, the weighted average cost of capital, the performance or otherwise known as the capacity factor, which we've talked about on this show a little bit, and of course the project design life.

And the report notes that those LCOE costs have actually fallen faster than the capital costs.

And I wonder if this isn't another interesting methodological issue here, that the costs of these five key components of the LCOE have fallen faster than the so-called overnight capital cost, this fiction called a capital cost, of the plant itself, and that that in itself might have led to underforecasting wind's growth because most of that stuff was done in capacity terms.

optimal, Dean? Okay.

decreases the WACC and minimizes WACC.

It minimizes the WACC.

So optimal debt ratio is the one that yields the lowest WACC.

So when a company is under 11, it has too little debt, it has a cost to capital higher than the option.

That's bad, right? But let's say the company pushes back.

To fund that without draining their cash reserves, they had to choose a capital source.

So they optimized a metric called the Weighted Average Cost of Capital, or WACC.

Wait, let's get into the weeds on that.

WACC, right?

Yeah, WACC.

The fundamental premise is that capital isn't free.

Right.

Yeah.

On one side, the momentum capital is aggressively pulling the rope.

Like Invesco LTD.

Yes.

You really have to look at the mandate of those specific funds, though.

How so?

The capital flowing from Invesco and J.P. Morgan in this instance is heavily driven by algorithmic trend following and growth at a reasonable price mandates or, well, in this case, growth in an unreasonable price mandate.

Right.

Okay.

Because they have zero debt, that 9.44% serves as our exact proxy for their weighted average cost of capital, the WACC.

Easy enough.

We model a perpetual terminal growth rate of 3.5%, assuming they outpace baseline GDP growth indefinitely just due to the sheer stickiness of the DevSecOps market.

Is the return the company generates on its invested capital actually exceeding the cost it took to acquire that capital?

Right.

If your WACC is 9.44%, every dollar you deploy needs to generate at least a 9.45% return just to break even on an economic basis.

To not lose value.