Schalheim Sisters Inc. has always paid out all of its earnings as dividends, and hence has no retained earnings. This same situation is expected to persist in 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 reduce the WACC?

Question

Quizplus · Accepted Answer

A decrease in the market risk premium would decrease the cost of equity, which would in turn decrease the weighted average cost of capital (WACC). The other options would either increase the cost of equity or the cost of debt, resulting in an increase in WACC.