Company xyz has a target capital structure of 50% equity and 50% debt. its cost of equity is 6%, and cost of debt is 8% what would happen to xyz's wacc if its capital structure were to shift to 75% equity and 25% debt? assume a tax rate is40%.

a. wacc decrease
b. wacc increases
c. wacc remains constant

Option (B) is correct.

Explanation:

WACC = (We × ke) + [Wd × kd × (1 - t)]

where,

We = Equity

Wd = Debt

ke = cost of equity

kd = cost of debt

t = tax rate

At 50% equity and 50% debt,

WACC = (50% × 6%) + [50% × 8% × (1 - 0.4)]

           = 5.40%

At 75% equity and 25% debt,

WACC = (75% × 6%) + [25% × 8% × (1 - 0.4)]

           = 5.70%

Therefore, there is an increase in the XYZ's WACC if its capital structure were to shift to 75% equity and 25% debt.

(D) inventory obsolescence

Explanation:

It is known as the phase where the inventory is at the end or final stage of its product cycle. This inventory can be sold or used for the long run and is then not expected or liable to be given or sold in the future by the company. As she doesn't know whether the inventory is missing or does not know if it has been broken or stolen, she can note this down and thus can asset for the criteria following the valid integrity testing.