Which of the following statements is most correct?
A) Since debt financing raises the firm's financial risk, raising a company's debt ratio will always increase the company's WACC.
B) Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce the company's WACC.
C) Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing; however, it still may raise the company's WACC.
D) Statements a and c are correct.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

None of the statements is entirely correct because increasing debt can lower WACC up to a point due to the tax shield, but excessive debt increases financial risk, potentially raising WACC.

Which of the Following Statements Is Most Correct