Effect on cost of capital
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How would each of the following affect a firm's cost of debt, rd(1-T); its cost of equity, rs; and its weighted average cost of capital, WACC? Indicate by a plus (+), a minus (-), or a zero (0) if the factor would raise, lower, or have an indeterminate effect on the item in question. Assume other things are held constant.
Rd(1-T) Rs WACC
The corporate tax rate is lowered
The Federal Reserve tightens credit
The firm doubles the amount of the capital it raises during the year
The firm expands into a risky new area
Investors become more risk averse
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The solution explains the effect of given transactions on the cost of capital.
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How would each of the following affect a firm's cost of debt, rd(1-T); its cost of equity, rs; and its weighted average cost of capital, WACC? Indicate by a plus (+), a minus (-), or a zero (0) if the factor would raise, lower, or have an indeterminate effect on the item in question. Assume other things are held ...
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