Using a 50/50 debt/equity mix, a 1% reduction in which cost of capital category would drive a larger reduction in WACC?Select an answer:equityequal impact from equity and debtnot enough informationdebt

The answer is "equal impact from equity and debt".

Here's why:

The Weighted Average Cost of Capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Where: Re = Cost of Equity Rd = Cost of Debt E = Market value of the firm's equity D = Market value of the firm's debt V = E + D = Total Market value of the firm's equity and debt Tc = Corporate tax rate

In a 50/50 debt/equity mix, the weights of debt and equity are equal. Therefore, a 1% reduction in either the cost of equity or the cost of debt would have an equal impact on the WACC.

The answer to this question depends on the specific rates of the cost of debt and cost of equity before the reduction. However, in general, a 1% reduction in the cost of equity would typically have a larger impact on the Weighted Average Cost of Capital (WACC) than a 1% reduction in the cost of debt. This is because the cost of equity is usually higher than the cost of debt, due to the higher risk associated with equity financing. Therefore, a 1% reduction in a larger number (cost of equity) would result in a larger absolute reduction than a 1% reduction in a smaller number (cost of debt). So, the answer is "equity".