Question

Provide an analysis of how managerial decisions affect the structure of the WACC.

Answer 1

managerial decisions regarding the capital structure of a company decides the weighted average capital of the company to the largest extent.

When a manager decides to use High amount of debt financing to the overall capital structure, since there is tax deduction available to the interest payments, the weighted average cost of capital would be lower.

When a manager decides to use higher amount of equity financing to the overall capital structure, the weighted average cost of capital is generally high because the cost of equity is generally higher than cost of debt because cost of equity does not associate itself with any tax deduction.

it is the general exemption that when the tax rates are high, management decides to opt for higher amount of debt financing than the equity financing because the interest rate tax shield would be higher as there would be higher limits of tax deductions which could be associated with interest payment to debt financers.