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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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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 ...

Solution Summary

The solution explains the effect of given transactions on the cost of capital.

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