Question

All else the same, which of the following is the most likely to cause an increase...

All else the same, which of the following is the most likely to cause an increase in a company’s WACC:

A. A decline in interest rates

B. A decline in the stock's beta

C. An increase in the company's credit rating

D. An increase in the company's net income margin

E. An increase in the expected market risk premium

Can't decide between two options here. Thanks

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Answer #1

The correct asnwer is option e i.e. an increase in the expected market risk premium.

FORMULA for WACC= cost of common stock* weight of common stock+ cost of preferred stock* weight of preferred stock + cost of debt * weight of debt
As per CAPM,
Cost of equity= Rf + (market risk premium*Beta)
Rf=Risk free interest

Hence increase in market risk premium will increase the cost of equity which in turn will increase the weighted average cost of capital.

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