Market fluctuations cause a company's stock price to drop sharply, reducing its market value of equity. How does this affect WACC and the firm's capital structure?
a.) WACC decreases because the tax shield on debt becomes more valuable.
b.) WACC decreases because equity becomes cheaper when stock prices fall.
c.) WACC remains unchanged because debt and equity costs are fixed.
d.) WACC may increase because the proportion of debt rises, increasing financial risk.
a.) WACC decreases because the tax shield on debt becomes more valuable.
b.) WACC decreases because equity becomes cheaper when stock prices fall.
c.) WACC remains unchanged because debt and equity costs are fixed.
d.) WACC may increase because the proportion of debt rises, increasing financial risk.