Question

Weighted average cost of capital is a long way as to how much earnings a company can achieve through the costs of its projects and ultimately any products that are sold. If you were the financial manager do you have a preference for how the company would be capitalized? Do you believe that awaiting skewed more toward debt would be advantageous or more equity?

Answer 1

Weighted average cost of capital is a combined cost of common equity, preferred equity and debt therefore when wacc is calculated it gives a view or rather estimation that how much their project should produce in order of return to carry and maintain the growth and survival of a company because wacc is the minimum cost which a company have to bear to keep on going.

If i were the financial manager yes i would have a preference how the company would be capitalised as what all capital component or rather capital structure a company is having is very important to determine as the capital structure should be according to the cash flow of the company, if the potential or future cash flow is certain then the company can take more of debt in their capital structure and if not then the financial manager should include more of equity in capital structure.

will Awaiting skewed more towards debt or equity be advantageous , answer depends on the nature of cash flow, If certain future cash flow hen debt and if uncertain future cash flow then equity because in equity there is no fixed payment obligation.