Question

If we hold the firm's ability to produce cash constant, then minimizing the weighted average cost of capital (WACC) is the same as:

a. Maximizing shareholder value
b. Increasing operating profit
c. Reducing financial risk
d. All of the above

Answer 1

Minimizing the weighted average cost of capital (WACC) is the same as maximizing shareholder value, increasing operating profit, and reducing financial risk.

Step-by-step explanation:

Minimizing the weighted average cost of capital (WACC) is the same as maximizing shareholder value, increasing operating profit, and reducing financial risk. The WACC represents the average cost of capital for a company, including both debt and equity. By minimizing the WACC, a company can increase its profitability, attract more investors, and reduce its risk of default.

When a company reduces its WACC, it lowers the cost of financing its operations. This allows the company to generate higher returns on its investments and increase shareholder value. Additionally, a lower WACC can lead to increased operating profit as the company can invest in new projects with higher returns.

By minimizing the WACC, a company can also reduce its financial risk. A higher WACC indicates a higher cost of borrowing, which increases the company's risk of default. By decreasing the WACC, the company can lower its cost of debt and reduce its overall financial risk.