Strategy

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Strategy Capital Is Expensive Again. Now What? by Michael Mankins March 30, 2023 Summary. Luisella Sem/EyeEm/Getty Images With interest rates rising in real terms, the value of growth strategies has declined. Managers need to look carefully at where they allocate capital, focusing more on investing in productivity. Nor should they treat strategy-making as a periodic exercise but rather as a dynamic, continuous process close Leer en español For most of the last 15 years, capital has been cheap. Since 2009, the after-tax cost of borrowing for some large companies has been below the rate of inflation, making their debt in real terms cost- free. And for much of this time, the stock market moved steadily upward, consistent with historically low costs of equity. We estimate that in early 2022, the weighted-average cost of capital (WACC) for the average company in the S&P 500 hovered below 6%. All that changed in March 2022, when the world’s central banks began raising rates to curb rising inflation. Over the next 12 months, the U.S. Federal Reserve increased its benchmark Fed Funds rate f rom 0.25% to 4.75% and the yield on 10-year treasury notes climbed from 1.75% to almost 4...