All else held constant, which one of these is most apt to increase the WACC of a leveraged firm? Select one: a. A decrease in the tax rate b. An increase in the risk free rate when the equity beta is > 1 c. A decrease in the dividend growth rate d. An increase in the weight of debt e. A decrease in a firm’s equity beta
All else held constant, which one of these is most apt to increase the WACC of a leveraged firm? Select one: a. A decrease in the tax rate b. An increase in the risk free rate when the equity beta is > 1 c. A decrease in the dividend growth rate d. An increase in the weight of debt e. A decrease in a firm’s equity beta
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
All else held constant, which one of these is most apt to increase the WACC of a leveraged firm?
Select one:
a. A decrease in the tax rate
b. An increase in the risk free rate when the equity beta is > 1
c. A decrease in the dividend growth rate
d. An increase in the weight of debt
e. A decrease in a firm’s equity beta
Expert Solution
Step 1
Weighted Average Cost of Capital
where
- Kd=Cost of Debt
- Ke=Cost of Equity
- T=Tax rate
- D=Market Value of Debt
- E=Market Value of Equity
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