An entity undertakes an issue of new debt which has the effect of reducing the...

CIMA F2 Question Answer

An entity undertakes an issue of new debt which has the effect of reducing the entity's weighted average cost of capital (WACC).

Which of the following would best explain why the WACC will have fallen?

The entity was 100% equity financed prior to the issue of the debt.

The risk to the shareholders has reduced leading to a fall in the cost of equity.

The new debt is being used to replace existing debt that had a lower cost.

The new debt is being used to replace existing debt that had the same cost.

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