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Is the decision to raise approximately $20 million to finance the new division exclusively using new...

Is the decision to raise approximately $20 million to finance the new division exclusively using new equity likely to affect HK’s WACC? Explain why or why not in terms of financial leverage, component costs, and capital structure. What is the likely impact? (Note: A recalculation of the WACC is not required for this question.)

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Yes it will be likely to affect the weighted average cost of capital of the company because when there will be a raising of equity capital then the overall amount of debt capital in the entire debt ratio and leverage ratio will be going down and it will also mean that the company will be having an additional dissolution of its stake in the market.

It will be leading to increase in the cost of equity in the overall cost of capital as the the weight of equity will be going up and it will also mean that weight of debt capital will be going down.

Weighted average cost of capital will be likely to be impacted because it is generally known that the cost of equity will be higher than the cost of debt and it can lead to an overall increase in the cost of debt, but it will provide optimum flexibility and liquidity to the company in order to not have higher amount of debt on its overall books of accounts.

jeff jeffy answered 1 year ago
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