How can a company reduce its weighted average cost of capital?
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How can a company reduce its weighted average cost of capital?
What is the difference between operating and financial leverage? Can there be too much financial leverage in a firm? Why or why not?
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Solution Summary
The solution discusses how a company can reduce its weighted average cost of capital. The difference between operating and financial leverage is given.
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A company can reduce its weighted average cost of capital by increasing debt ratio as debt is a less costly as a source of finance than equity because interest on debt is a tax deductible expense. increasing debt would mean that a cheaper source of finance will get more weightage as a result the weighted average cost of capital would come down.
Operating leverage refers to the sensitivity of earnings before interest and taxes to changes in sales revenue.
Operating ...
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