Kim believes that analyst forecasts are too pessimistic with respect to DongSun’s residual income prospects after 2014. In a recent conference call, DongSun’s management presented its plan to improve future profitability, particularly the economic value added (EVA), by focusing on the following three strategic company goals:
- Adjust financial leverage to the optimal level
The answer says: Adjusting financial leverage to the optimal level will decrease the cost of capital and thus increase EVA
Is this a little unclear as the question doesn’t tell us which way the leverage is being optimised so how do we know which way the cost of capital will go?
If leverage is moved up, risk goes up and therefore WACC goes up right? If leverage is optimised downards then the opposite. Just wondering why the solution only states a reduction in WAXX