Solutions to Web Appendix 10A

Solutions to Web Appendix 10A - Web Appendix 10A The Cost...

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Unformatted text preview: Web Appendix 10A The Cost of New Common Stock and the WACC Answers to Questions 10A-1 In reality, the WACC would probably not take as sharp a jump from 11.5% to 12.5%. The firm would make adjustments to its capital structure and/or its dividend payments, and these adjustments would cause the WACC curve to increase slowly and smoothly beyond the breakpoint. Consequently, it would not be necessary for the firm to issue additional new equity to accept some of these additional projects. 10A-2 As the firm’s IOS curve is pushed out to the right the opportunity cost of raising additional capital also rises due to increased risk. Consequently, the project’s expected return will not cover its required return. 10A-3 Yes, the firm can have additional WACCs unrelated to having to issue new equity at higher costs. It’s important to realize that the costs of issuing additional debt and/or preferred stock can also...
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Solutions to Web Appendix 10A - Web Appendix 10A The Cost...

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