Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. company xyz has a target capital structure of 30%

Company XYZ has a target capital structure of 30% equity and 70% debt. Its cost of...

Free

60.1K

Verified Solution

Question

Finance

Company XYZ has a target capital structure of 30% equity and 70%debt. Its cost of equity is 10%, and cost of debt is 5%. What wouldhappen to XYZ’s WACC if its capital structure were to shift to 40%equity and 60% debt?

wacc increases decreases or stays constant? and why

Answer & Explanation Solved by verified expert
3.8 Ratings (364 Votes)

Step-1:Calculation of existing WACC
Weight Cost
a b a*b
Equity 30% 10% 3.00%
Debt 70% 5% 3.50%
WACC 6.50%
Step-2:Calculation of modified WACC
Weight Cost
a b a*b
Equity 40% 10% 4.00%
Debt 60% 5% 3.00%
WACC 7.00%
So, WACC increases.
Cost of equity is more than cost of debt.
When weight of equity increases,overall WACC increases because increase in weighted cost of equity(4.00%-3.00%=1.00%) is more than decrease in weighted cost of debt(3.50%-3.00%=0.50%).

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Company XYZ has a target capital structure of 30% equity and 70%debt. Its cost of equity is 10%, and cost of debt is 5%. What wouldhappen to XYZ’s WACC if its capital structure were to shift to 40%equity and 60% debt?wacc increases decreases or stays constant? and why

Other questions asked by students

Q

Using a site in Northern California you repeat Stiling and Drake s experiments in elevated...

Biology
Q

The linear speed of a uniform spherical sh after rolling down an inclined plane vertical...

Physics
Q

According to the National Institutes of Health 68 of adults experience some form of lactose...

Statistics
Q

Observe that r t a cos t b sin t defines an ellipse a Find...

Calculus
Q

What is Cohu's 2015 Inventory Turn Days? (round to 1 decimal--what good will...

Accounting
Q

how to calculate the wages expense

Accounting
Q

Under the perpetual inventory system, when a sale is made, both the sale and cost...

Accounting
Q

Sales revenue for Booker Company for 2023 amounted to $800,000. The products sold carry a...

Accounting
Q

Determine the value of y= 3/7 +(2) ln () using 4-digit rounding and 4-digit chopping...

Accounting
Q

1. how do company's calculate current ratios?2. how do company's calculate revenues?

Accounting
Q

When valuing an MNC, if the required return on its investments in foreign countries is...

Finance
Q

The following is a partial trial balance for General Lighting Corporation as of December 31,...

Accounting