Monday, May 05, 2014

"We're right and they're wrong": Cost of Capital: WACC ? or Opportunity Cost

I'm no expert, but what Buffett says makes sense and what Buffett does makes cents. If I understand correctly, he's talking about Opportunity Costs. #BRK2014
Morningstar analyst Gregory Warren, who filled the seat left vacant by the dearth of credentialed Berkshire bears, asked for Berkshire's cost of capital and whether it plays into acquisition decisions. Buffett said the term is thrown around a lot and means different things in a lot of those contexts. This gave Munger another chance to make fun of business schools.
"Charlie and I always figure our cost of capital is what can be purchased by our second-best idea, and then we have to exceed it with our best idea," Buffett said. The real test, he said, is whether Berkshire benefits more than the cost of the acquisition. Identifying the cost of capital is often a game, he said. The CFO of a company almost always argues that a purchase exceeds the company's cost of capital.
Cost of capital does not mean what they say it means in business school, Munger said. "The answer is perfectly simple: We're right and they're wrong."
Compare that to WACC Weighted Average Cost of Capital calculation.

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