Question

1. What would happen to a corporation stock if its actual return on investment was higher than its Weighted Average Cost of Capital? And what would happen to its stock if ROI was consistently lower than its WACC?

Answer 1

When actual return on investment is higher than WACC then it means the investment is adding value to the company and hence corporation is growing because we have raised capital for an investment at a particular rate and we are earning greater than that particular rate and therefore our value will increase

Hence corporation stock price will increase .

Similarly when Actual return is less than WACC then it means corporation is losing value and hence corporation stock price will Decrease.