Series 79 practice questioneasyWACC Fundamentals
Which of the following changes would most likely cause a company’s WACC to decrease, all else equal?
- AAn increase in the proportion of debt financing, assuming the company is not over-levered.✓ Correct answer
- BAn increase in the company’s equity beta.
- CA decrease in tax rates.
- DA higher required return on equity by shareholders.
Explanation
Why A — An increase in the proportion of debt financing, assuming the company is not over-levered.
Increasing debt (within reasonable limits) lowers WACC due to the tax shield from interest. Higher equity beta and required return on equity increase WACC, while lower tax rates reduce the value of the debt tax shield, increasing WACC.
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