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Question
Which of the following statements is CORRECT?a. Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
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.
c. 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.
d. Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
e. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
Answer
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