Which statement is true regarding WACC for a small pizza store compared to a larger chain like Domino's?

Which statement is true regarding WACC for a small pizza store compared to a larger chain like Domino's?

• A. The small pizza store generally has a lower WACC
• B. The small pizza store typically has a higher WACC
• C. Both have the same WACC due to industry standards
• D. The larger chain always has a higher WACC

Answer: (B)

A small pizza store typically has a higher weighted average cost of capital (WACC) compared to a larger chain like Domino's due to several factors related to risk and access to capital. The WACC reflects the average rate of return that a company is expected to pay to its security holders to finance its assets, and it is influenced by the cost of equity and debt. For a small pizza store, the perceived financial risk is usually greater because of limited operating history, less diversified revenue streams, and potentially greater vulnerability to market fluctuations. Investors and lenders commonly view small businesses as higher risk, which can increase the cost of equity since investors demand a higher return as compensation for taking on that increased risk. Moreover, smaller businesses typically have fewer options for obtaining financing, leading to higher borrowing costs. In contrast, larger chains like Domino's benefit from economies of scale, a well-established brand, and a more stable cash flow. This stability and brand recognition reduce the perceived risk, allowing them to enjoy lower costs of equity and debt. Consequently, their WACC would be lower, reflecting the lower risks associated with their size and market position.

A small pizza store typically has a higher weighted average cost of capital (WACC) compared to a larger chain like Domino's due to several factors related to risk and access to capital. The WACC reflects the average rate of return that a company is expected to pay to its security holders to finance its assets, and it is influenced by the cost of equity and debt.

For a small pizza store, the perceived financial risk is usually greater because of limited operating history, less diversified revenue streams, and potentially greater vulnerability to market fluctuations. Investors and lenders commonly view small businesses as higher risk, which can increase the cost of equity since investors demand a higher return as compensation for taking on that increased risk. Moreover, smaller businesses typically have fewer options for obtaining financing, leading to higher borrowing costs.

In contrast, larger chains like Domino's benefit from economies of scale, a well-established brand, and a more stable cash flow. This stability and brand recognition reduce the perceived risk, allowing them to enjoy lower costs of equity and debt. Consequently, their WACC would be lower, reflecting the lower risks associated with their size and market position.