If a firm's stock price increases and interest rates decrease, its weighted average cost of capital will decrease.

Question

Quizplus · Accepted Answer

A firm's weighted average cost of capital is calculated using the cost of equity and the cost of debt. A stock price increase indicates that investors believe the company's future cash flows will increase, which will lower the cost of equity. When interest rates decrease, the cost of debt decreases as well. Therefore, a firm's weighted average cost of capital will decrease if both of these factors occur simultaneously.

If a Firm's Stock Price Increases and Interest Rates Decrease