Question

provide an analysis of how managerial decisions affect the structure of the WACC

Answer 1

WACC is affected by the choice of the weights of debt , equity and preferred stock.. An optimal capital structure provides minimum WACC. A levered firm firm has lower WACC as compared to all equity firm since interest on debt is tax deductible. But as leverage increases the cost of debt increases due to increase in risk.. Management can decide to use retained earnings as cost of flotation and legal fees are not included in WACC.

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