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: Flex 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

Operations Management
1.2K views

Assuming that you are IT manger in your organization and your president asked you to illustrate...

Psychology
1.2K views

Do you believe that social norms were followed completely as far as getting married first then...

Physics
1.2K views

a 0 88 A 3A galvanometer having a resistance of 50 2 gives a full...

Geometry
1.2K views

8 7 96

Geometry
1.2K views

x 8x 12 0 a Write the equation in vertex form by completing the square...

Basic Math
1.2K views

Determine if the following function is a polyn 3 2 f x x 3x 8...

Statistics
1.2K views

A t distribution with 6 degrees of freedom is graphed below The region under the...

Algebra
1.2K views

Use the Gram-Schmidt process to find orthonormal bases for the spaces

Accounting
1.2K views

Bramble Corporations adjusted trial balance contained the following accounts at December 31, 2017: Retained Earnings...

Accounting
1.2K views

Pharoah Corp. has the following beginning-of-the-year present values for its projected benefit obligation and market-related...

Accounting
1.2K views

Samuel y Darci son socios. El capital social de Samuel es de $50 000 y...

Finance
1.2K views

Case 1: Consider a one-year, $150,000 ARM with a 30-year amortization period. The index rate...