In question 59, why replacing debt with preferred stock will increase the firm’s cost of capital thereby lowering its EVA?
i am asking why it is lowering?
EVA is NOPAT - $ WACC
when you look at the first paragraph it clearly says that DEBT RATIO IS WELL BELOW OPTIMAL LEVEL
if you keep reducing debt ( by paying debt with capital ) you keep going away from optimal level, you keep raising WACC , you keep raising $WACC, you keep reducing EVA…
thanks for the reply, now i get it
I found the last two cases in this test are pretty diffcult. I did it last night and used appr. 1hr to finish these two cases.
Still, I made 6 mistakes in them. I am gonna check again tonite.