Which one of the following statements is correct for a firm that uses debt in its capital structure?
A)The WACC should decrease as the firm's debt-equity ratio increases.
B)When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.
C)The firm's WACC will decrease as the corporate tax rate decreases.
D)The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
E)The WACC will remain constant unless a firm retires some of its debt.

Question

Quizplus · Accepted Answer

The use of debt in a firm's capital structure can lead to a decrease in the Weighted Average Cost of Capital (WACC) due to the tax deductibility of interest payments, which effectively reduces the cost of debt.

Which One of the Following Statements Is Correct for a Firm