Question

If a company's weighted average cost of capital is less than the required return on equity, then the firm

A) is financed with more than 50% debt.
B) is perceived to be safe.
C) has debt in its capital structure.
D) must have preferred stock in its capital structure.

Answer 1

If a company's weighted average cost of capital is less than the required return on equity, it means that the company has debt in its capital structure.

Step-by-step explanation:

If a company's weighted average cost of capital is less than the required return on equity, it means that the company is not generating enough return to meet the expectations of its equity investors. In this case, it is likely that the company has debt in its capital structure. Having debt in the capital structure allows the company to lower its overall cost of capital, as debt is generally cheaper than equity. Therefore, the correct answer is C) has debt in its capital structure.