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 stays unchanged, since book values are the 'true' measure of a firm's underlying capital base.
- The WACC will decrease because the weight of (typically cheaper) debt has increased relative to equity.
- The WACC rises because the firm now looks more likely to default on its outstanding debt obligations.
- The WACC increases because investors will demand a higher risk premium for holding the now-riskier equity.
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