 |
Investopedia explains 'Wealth Added Index - WAI'
Financial theory says that the cost of equity for a company should be greater than the return available on risk-free securities such as government bonds because a company is riskier. (The greater the risk an investor assumes, the greater the return he or she should require.) So, if a company's returns don't exceed its cost of equity, then shareholders should invest their money elsewhere.
In other words, according to the WAI, if return is less than the cost of equity, the company is actually destroying shareholder value.
|
