Question

Which of the following events will reduce a company's weighted average cost of capital (WACC)? A)...

Which of the following events will reduce a company's weighted average cost of capital (WACC)?

A) An increase in expected inflation.

B) A reduction in the company's bond rating.

C) None of the above.

D) An increase in the market risk premium.

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Homework Answers

Answer #1

The answer is option C

WACC refers to the weighted average cost of capital of the firm which consist of cost of debt and cost of equity.

In case of decrease in bond rating, the company has to pay more to the debtholder as they will demand higher return.

The market risk premium increase will lead to higher WACC as the company will need to match the expected return of the market to keep lucrative option for investors.

The inflation will lead to more WACC as the firms nominal cost of capital will increase. Therefore, none of the options are correct.

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