Question

In terms of potential capital investment projects, why is the lowest-cost WACC such a critical factor linking capital structure decisions to maximum value of operations and stock price?

Answer 1

Solution:-

Weighted average cost of capital is the hirdhle rate for investment in a project. Project with low hirdle rate are more likely to be accepted by the company which will therefore add more value to share holders of company. A good investment project and shareholder wealth are Inversely related So in short lower WACC will maximize shareholder wealth. So when it comes to the decisions like that of capital Investment projects wherein large amount of capital and time is involved lowest - cost WACC will help the management in linking of capital structure decisions to maximise value of operations and that of stock price.