Question

1. WACC What role does the cost of capital play in the overall financial decision making of the firm’s top managers?

2. DEBT VS EQUITY Why do you think debt offerings are more common than equity offerings and typically much larger as well?

Answer 1

1. WACC = Cost of equity * Weight of Equity + Cost of Debt *(1-tax rate)* Weight of debt
Optimizing WACC is the main task of top managers to increase the value of firm .This is done by managing the capital structure of the firm. Higher WACC reduces the value of firm and lower WACC increases the value of firm.

2. Debt is more common than equity offerings because it does not dilute ownership of the firm and at the same time interest payments are tax deductible. Moreover government raises funds through debts. Hence treasury bills and government bonds are very common.

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