Practice // Questions and comments // Can a reduction in net financial debt reduce WACC?

Cost of capital : Question 2
Can a reduction in net financial debt (prompted by a decrease in working capital) reduce WACC?

ALL THEMES
  • COST OF CAPITAL
  • FINANCIAL ANALYSIS
  • FINANCIAL ENGINEERING
  • FINANCIAL MANAGEMENT
  • FINANCIAL POLICY
  • VALUATION
It is true that a reduction in working capital results in a reduction in net debt. It also results in an improvement in shareholder risk, as operating assets are financed by less debt and relatively more equity. On markets in equilibrium, a reduction in the share of debt in capital employed will be set off by a reduction in the cost of equity, leaving WACC unchanged (for more details see chapter 23 of the Vernimmen).

For more information, see chapter 29 of the Vernimmen.