BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the calculated WACC depend in any way on the size of the capital budget? How might dividend policy affect the WACC?

Summary Introduction

To explain: If the WACC would be different or not if the upcoming year’s equity comes solely in the form of retained earnings rather than from the new common stock issue and based on the size of the capital budget and dividend policy.

Introduction:

Weighted Average Cost of Capital: It is the WACC (Weighted average cost of capital) of all the sources through which a firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is computed by taking the relative weight of each item of capital structure.

Explanation
  • The WACC would be reduced if the coming year’s equity solely comes in the form of retained earnings rather than from the issue of new common stock.
  • WACC depend upon the size of the capital budget. If there is high use of the retained earnings rather than new common stock the firm’s WACC will get decreased. The different sources of raising the capital and cost of each of the source affect the WACC.
  • WACC is influenced by the dividend policy of the firm. Higher the dividend payout higher the WACC and minimum dividend payout ratio the lower will be WACC.
  • The retained earnings cost is lower than the new equity cost...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Why do economists make assumptions?

Brief Principles of Macroeconomics (MindTap Course List)

What are some of the benefits and limitations of a team?

Foundations of Business (MindTap Course List)

Why should policymakers think about incentives?

Essentials of Economics (MindTap Course List)

What is an ERP system?

Accounting Information Systems

Define the term marketing

MKTG 12:STUDENT ED.-TEXT

EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, a...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)