Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt...
Which of the following statements about capital structure and the WACC is CORRECT?
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A. Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its WACC.
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B. Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company’s WACC.
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C. Since debt financing raises the firm's financial risk, increasing a company’s debt ratio will always increase its WACC.
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D. Increasing a company’s debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company’s WACC.
Homework Answers
Ans D. Increasing a company’s debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company’s WACC.
All other options are incorrect.
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