Political Imaginaries of the Weighted Average Cost of Capital: A Conceptual Analysis

Abstract

This article analyzes the formulation of the “weighted average cost of capital” in the manuals of two of the most influential associations of financial analysts. It focuses on the use of the formula as the discount rate to determine the “fundamental value” of listed companies using the “discounted cash flows” method, a cornerstone of the definition of “shareholder value” used in the finance industry worldwide. It shows that the choice of variables and their mathematical relations in the formula mobilize multiple, partly independent and contradictory epistemologies and ontologies. This multiplicity is assembled along political imaginaries concerning the relation between particular notions of the maximizing investor, the efficient markets and the sovereign state. The figure of the investor is considered the only legitimate agent to claim the “free” cash flows of the company, the efficient markets are considered the source of truthful representation of value, and the state is supposed to guarantee both the fair play between investors and a minimum revenue for money owners, to be extracted from the rest of society through the tax system. The formula thus legitimizes and renders self-evident power relations that sustain the global inequalities produced by the finance industry.

Value as ethics: Climate change, crisis, and the struggle for the future

“…They do this in ways that assert that this orientation is a politically and morally just way of organizing society. I observe that Ortiz (2013, 2021) is correct in his critical analytical attention to value's political and moral implications. When interlocutors I know use phrases such as “a phase of value creation,” “exit value for the firms,” “value structure,” “the value is in the upstream,” “net present value,” and “maximizing the value of your assets,” they are advancing not just financial narratives but also ethical orientations of material and political significance 5 .…”

“…This formulation is vitally important because it vacated value's philosophical moral meanings and supplemented it with a positive normativity associated with capitalist production. Anthropologists have long rejected this dichotomy and have documented how economic notions of value have percolated into calculative and moral practices of business and finance (Ho, 2009; Leins, 2018; Miyazaki, 2013; Ortiz, 2021; Zaloom, 2004). In his ethnography of private equity firms, for example, Daniel Souleles (2019) shows that the concept of value not only is central to financial practices but also carries a double meaning as both a notion of capitalistic account and a moral aspiration.…”

“…He argues,

Value always needs to circulate from the realm of the noble and the aspirational to the realm of price—that is, after all, how you keep score … for investors there must always be an equivalence between value and values. (Souleles, 2019, 120)

Drawing analytical attention to how the concept of “value” is used and circulated in finance and business, Horacio Ortiz (2021) urges us not to adopt it as an analytical concept but instead examine its connotations and how it is deployed. He suggests that by giving it critical attention rather than taking it for granted as an economic‐financial concept, anthropologists can decipher its multiple meanings and its ethical significance in shaping day‐to‐day practices and our material worlds.…”

Application and Feasibility Analysis of DCF Model in Corporate Valuation: A Case Study of Tesla, Inc.

“…This method involves estimating future cash flows and discounting them at a discount rate to produce the present value of future cash flows. It is used to compare the relative value of competing investment opportunities within companies and is a traditional way to determine the fundamental value of a company's assets, such as shares and debt [3].…”

Interpellating Finance – a dramaturgical model for green bond pricing

“…The financial subjectivities trainings in sustainable finance generate contain mixed and contradictory feelings that do not simply hold to a fixed ontology of the neoliberal investor (competitive homo economicus). On one hand, the training and the financial knowledge they acquire through this practice is directed to an 'imaginary of smartness' (Ortiz 2014(Ortiz , 2021Ortiz and Muniesa 2018; see also Dal Maso 2020;Tripathy 2022a) that calls for conversion into moneyeither in the form of high salary or the margins from successful financial deals. On the other, their drive to change finance as usual into its brand green features, makes them open to a compromise that is willing to give up sole focus on a profit motive.…”