medium · Principles of Finance cost-of-capital-structure
A company's stock price falls by 50% due to a market-wide correction, but its business fundamentals and debt levels remain unchanged.
What is the immediate effect on its WACC calculated using market weights?
- The WACC will remain unchanged because book values are the 'true' measure of the firm's capital.
- The WACC will decrease because the weight of (typically cheaper) debt has increased relative to equity.
- The WACC will increase because the firm is now more likely to default on its debt.
- The WACC will increase because investors will now demand a higher risk premium for the equity.
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