In weighted average cost of capital, rising in interest rate leads to

The correct answer is: A. increase in cost of debt.

The weighted average cost of capital (WACC) is a measure of a company’s cost of capital for a given capital structure. It is calculated by taking the weighted average of the costs of debt and equity capital, where the weights are the proportions of debt and equity in the company’s capital structure.

The cost of debt is the interest rate that a company pays on its outstanding debt. The cost of equity is the return that shareholders expect to earn on their investment in the company.

When interest rates rise, the cost of debt also rises. This is because companies have to pay more interest on their outstanding debt. The cost of equity is not directly affected by interest rates, but it can be affected indirectly. When interest rates rise, the return that shareholders expect to earn on their investment in the company may also rise. This is because shareholders are now able to earn a higher return on their investment in other assets, such as bonds.

Therefore, when interest rates rise, the WACC also rises. This is because the cost of debt rises and the cost of equity may also rise.

Here is a brief explanation of each option:

• Option A: increase in cost of debt. This is the correct answer. When interest rates rise, the cost of debt also rises. This is because companies have to pay more interest on their outstanding debt.
• Option B: increase capital structure. This is not the correct answer. The capital structure of a company is the mix of debt and equity financing that the company uses. The capital structure does not change when interest rates rise.
• Option C: decrease in cost of debt. This is not the correct answer. When interest rates rise, the cost of debt also rises. This is because companies have to pay more interest on their outstanding debt.
• Option D: decrease capital structure. This is not the correct answer. The capital structure of a company is the mix of debt and equity financing that the company uses. The capital structure does not change when interest rates rise.