Larry\'s Discount Club currently has a weighted average cost of capital of 12%.

Question

Larry's Discount Club currently has a weighted average cost of capital of 12%. Larry's has been growing rapidly over the past several years, selling common stock in each year to finance it's growth.

However, due to difficult economic times this year, Larry's decides to cut it's dividend and increase it's retained earnings so that common equity portion of its capital structure will include only retained earnings and no new common stock will be sold.

Larry's weighted average cost of capital this year should be.... Which of the following best choice:

A. greater than 12%
B. zero, since no new work will be sold
C. less than 12%
D. equal to 12%

Explanation / Answer

B. zero, since no new work will be sold

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