The BongoBongo Drum Co. uses debt and equity in its capital structure and has positive earnings. A decrease in investor risk aversion would decrease the firm's WACC.

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Quizplus · Accepted Answer

A decrease in investor risk aversion typically leads to a lower required return on both equity and debt, as investors are willing to accept lower returns for the same level of risk. This, in turn, reduces the firm's weighted average cost of capital (WACC) since WACC is a blend of the costs of debt and equity.