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 circumstance would reduce the WACC?

Question

Quizplus · Accepted Answer

A decrease in the market risk premium would decrease the cost of equity (since it is a component of the CAPM calculation) and, therefore, would reduce the overall WACC. The other answer choices would increase the cost of equity, cost of debt, or both, leading to an increase in the WACC.