Question

an increase in capital comes along with an increase in the WACC. Why is that always the case?

Answer 1

WACC is made up of different sources of capital namely

• bonds
• equity
• preferred stock

As the capital increases, that is the equity financing in a company increases due to the higher costs of equity financing the required return on equity increases. Which ultimately results in higher WACC. Debt is cheaper to equity financing .

The rise of WACC means a higher level of risk and lower valuations.

WACC= weight of debt*cost of debt + weight of equity*cost of equity capital + weight of preference capital*cost of preference capital ,

so as the costs of capital rises, the WACC rises.