Which of the following can contribute to lowering the WACC for a combined entity?

The correct answer highlights how an improved credit rating through synergies can effectively lower the weighted average cost of capital (WACC) for a combined entity. When two firms merge or combine, they often create operational efficiencies and stronger market positions, which can lead to a better credit rating. A higher credit rating generally implies lower perceived risk to lenders and investors, allowing the entity to secure debt at more favorable interest rates. This reduction in the cost of debt lowers the WACC, as the WACC is a weighted average that incorporates both the cost of equity and the after-tax cost of debt.

Consequently, if the merged entity is viewed as a stronger, less risky investment, it can also lead to a decrease in the required return on equity, further driving down the overall WACC. This synergy is a significant benefit of strategic combinations, where the whole is greater than the sum of the parts.

In contrast, operational inefficiencies could potentially raise costs, impairing efficiency and negating the benefits of a combined structure, therefore not contributing positively to WACC. Higher sales turnover might boost revenues but does not inherently lower the cost of capital or the ratios used in the WACC calculation. Increased tax liabilities would actually have the opposite effect, as they could increase the