IB Technical Interview Question Help!
Between two identical companies, one with zero debt and another with 50% debt, which will have the higher WACC?
Can someone help explain this question to me and what the proper answer would be?
The question seems pretty self explanatory, what part don't you get?
he one with no debt will have higher WACC because their WACC is just cost of equity. 50% company will be .5 * Re + .5 *Rd*(1-t) and cost of debt is generally lower than equity due to tax shield
Thanks
To add on to the answer above, you would probably want to clarify that this is "normal" debt, not high-yield or something egregious.
Thanks, got it
The question is basically framed as what would be higher, company with 100% equity or a company with mixture of debt and equity? Answer is the one with equity because COE is higher than COD because equity investors demand a higher return on their investment because in cases of bankruptcy equity holders are dealt with last behind debt holders.
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