If a company's weighted average cost of capital is less than the required return on equity, then the firm:

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is a weighted average of the cost of all the capital the firm has raised (debt, equity, preferred stock, etc.). If the WACC is less than the required return on equity, it means the cost of debt (and possibly other sources of capital) is lower than the cost of equity. This could be because the firm has more debt in its capital structure, which tends to have a lower cost than equity. Therefore, choice C is the best answer. Choices A, B, and D do not necessarily apply in this situation.

If a Company's Weighted Average Cost of Capital Is Less