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Unformatted text preview: of capital, which drives valuation of the interest rate paid to shareholders. When doing capital budgeting, knowing the total WACC for a targeted capital structure allows the organization to adjust its various WACC components (basically debt and equity) to maximize the tax benefits (of interest on debt) without overburdening its cash flow and total debt loads. What is the effect on WACC when an organization raises long-term capital? When an organization needs to raise long-term capital, it will result in two types of increases in WACC. The first increase is a basic interest rate addition to correspond with the increase in debt or equity. The second increase is a risk adjustment to the rate. Further, because the overall capitalization increases, the risk adjustment will be higher (due to the higher risks inherent in higher capital). The net impact on WACC is an increase that is slightly higher than the proportional increase in total capital....
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- Spring '08