Question

Which of the following will alter the capital structure of a firm, and therefore the weights used to calculate the firm’s WACC?   

Multiple Choice

• A decrease in the book value of the firm’s equity

• A decrease in the firm’s tax rate

• an increase in the firm’s beta

• an increase in the market value of the firm’s stock

• an increase in the market risk premium

Answer 1

Answer - an increase in the market value of the firm’s stock

Capital structure of a firm is based on market value of the components of its capital - debt, common equity or preferred equity. Market value of these components change when either the number of outstanding securities change or the market value of these securities change.

Of the given options, only change in market value of firm's common stock satisfies the above.

Other than that option 2, 3 and 4 would only change the cost of capital components and not capital structure.