Why might a company add a premium to its WACC?

A company may add a premium to its Weighted Average Cost of Capital (WACC) to establish a hurdle rate for investment decisions. The hurdle rate serves as the minimum acceptable return on an investment, ensuring that any project undertaken is expected to generate a return greater than this threshold. By setting a premium above the standard WACC, the company accounts for additional risks or uncertainties associated with specific investments or projects. This ensures that capital is allocated to projects that are likely to yield sufficient returns, promoting financial discipline and enhancing shareholder value.

In contexts where the investment environment is volatile or where specific projects carry heightened risks, adding that premium helps to safeguard the company's interests and provides a clearer benchmark for evaluating potential capital expenditures. This approach encourages the prudent selection of investments that can generate adequate returns in line with the company's strategic objectives.