The company’s CEO has stated if the company increases the amount of long term debt so the capital structure will be 60% debt and 40% equity, this will lower its WACC. Explain and defend why you agree or disagree.

Fin 370- Paper | Business & Finance homework help

I disagree with the CEO’s statement that increasing long term debt will lower the company’s WACC. It is true that increased debt may reduce capital cost, but it comes with additional risks for shareholders. An increased degree of leverage can lead to a lower credit rating and a higher risk of default, if market conditions or interest rates change. Additionally, investors may lose interest in the company if it has too many debts. Investors might not see enough returns to offset this risk.

Taxes should also be considered when looking at any changes to the capital structure. Higher levels of debt can lead to greater tax deductions, which could partially offset an increase in borrowing costs. If you want to reduce WACC by increasing your long term debt, it’s important that all factors are considered.

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