If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC), which of the following results would be preferred?
A)The firm should try to decrease the WACC because such an action will increase the value of the firm.
B)The firm should try to increase the WACC because such an action will increase the value of the firm.
C)The firm should try to decrease the WACC because such an action will decrease the value of the firm.
D)The firm should try to increase the WACC because such an action will decrease the value of the firm.
E)The firm should not try to change the WACC because changing the WACC will not change the value of the firm.

Question

Quizplus · Accepted Answer

Reducing the WACC will increase the value of the firm because a lower cost of capital means the firm can use its funds more efficiently and generate higher returns on investments. This will make the firm more attractive to investors and increase its value.

If a Firm Can Shift Its Capital Structure So as to Change