A firm's enterprise and equity values will increase in response to all of the following variables assuming other things are equal except for
A) An increase in profitable revenue growth
B) A reduction in cost of sales as a percent of sales
C) An increase in the firm's weighted average cost of capital
D) A decrease in the firm's weighted average cost of capital
E) A decrease in SG&A as a percent of sales

Question

Quizplus · Accepted Answer

An increase in the firm's weighted average cost of capital (WACC) would actually decrease both the enterprise and equity values of a firm. A higher WACC means the firm's future cash flows are discounted at a higher rate, reducing their present value. All other options (A, B, D, E) would likely increase a firm's value by either increasing revenue, reducing costs, or reducing the cost of capital.

A Firm's Enterprise and Equity Values Will Increase in Response