QUESTION 14 WhyNotCofee has always paid out all of ts earnings as dividends, hen

Question

QUESTION 14 WhyNotCofee has always paid out all of ts earnings as dividends, hence the fim has no retained earnings. This same sifuation is expected to persist n the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would INCREASE its WACC? s. This same situation is expected to persist the None of the above. The company's beta declines WhyNotCoffee decides to begin work on a new highly risky project WhyNotCoffee decides to grow its main business line The market risk premium declines

Explanation / Answer

To calculate WACC we need the proportion of debt, equity and preferred stcok in the capital structure. and also we use cost of individual capital. WACC will increase if cost of individual capital increase and weight remains constant or weight of highest cost capital increase.

if beta and risk premium decline and cost of equity will also decline and so WACC will decrease. if company works with highly risky project and required rate of return for investor would also be high and so cost of capital for risky project would be high. thus in this case WACC will increase.

Option (C) is correct answer.

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