Question

Factors that affect the WACC equation Each of the following factors affect the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm's control? Check all that apply.

a) The firm's capital structure
b) The general level of stock prices
c) The effect of the tax rate on the cost of debt in the weighted average cost of the capital equation

Answer 1

The factors outside a firm's control that affect the WACC equation are the general level of stock prices and the effect of the tax rate on the cost of debt.

Step-by-step explanation:

Factors outside a firm's control that affect the weighted average cost of capital (WACC) equation are:

1. The general level of stock prices: Changes in the stock market can affect a firm's cost of equity capital, which is a component of WACC.
2. The effect of the tax rate on the cost of debt in the WACC equation: Changes in tax rates can impact the cost of debt, another component of WACC.

On the other hand, the firm's capital structure is within a firm's control and refers to the proportion of debt and equity financing used to fund its operations. It directly affects WACC since debt and equity have different costs.