If a company has no debt, how does that affect its Weighted Average Cost of Capital (WACC)?

When a company has no debt, its Weighted Average Cost of Capital (WACC) is determined solely by its cost of equity. WACC is a calculation that reflects the average rate of return a company is expected to pay to its security holders to finance its assets, incorporating both equity and debt.

In a scenario where there is no debt, the capital structure of the company is entirely equity-based. This means that all financing comes from equity investors, and thus the WACC effectively mirrors the cost of equity. Without any debt to influence the WACC, factors such as interest rates on debt and the effect of tax shields from interest payments — which typically lower WACC when debt is present — do not apply. Therefore, when there is no debt, the WACC is equivalent to the company's cost of equity, which is directly linked to the required return on equity investments by shareholders.

This understanding highlights why the other choices do not hold in this scenario; they involve comparisons to a cost of debt or suggest a relationship not applicable when no debt exists.