Firms can maximize their profit by increasing the cash flows generated from their investments or minimizing the financing costs. You believe that the weighted average cost of capital (WACC) measures the risk of the cash flows generated from their investments. 

 

Required: 

a) You are tasked to estimate the weighted average cost of capital (WACC) of the firm. Write down the WACC equation, and the necessary steps for how you estimate WACC (no calculation). 

 

b) Provide at least 3 factors and 2 factors affecting the cost of equity and cost of debt, respectively.

 

c) What is the market reaction to the firm issuing shares to raise the long-term capital to fund their investments? Justify your answer. 

 

d) Firm raises the capital for its long-term investments by issuing shares (equity)and/or bond (borrowing) from the capital markets. And, the firm will raise its capital lower the cost of financing as possible. When firm should issue shares to raise capital, and when firm should issue bond for financing? Explain your answers to CFO.