According to the graph of WACC for Union Pacific, which of the following is (are) true?
A)The cost of equity is an increasing function of the debt-equity ratio.
B)The cost of equity is an increasing function of the debt-equity ratio, and the cost of debt is an increasing function of the debt-equity ratio.
C)The weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.
D)The cost of equity is an increasing function of the debt-equity ratio, the cost of debt is an increasing function of the debt-equity ratio, and the weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.

Question

Quizplus · Accepted Answer

From the graph, we can see that as the debt-equity ratio increases, the cost of debt and the cost of equity both increase. This is represented by the increasing slopes of both lines. However, the WACC decreases with an increase in the debt-equity ratio, as shown by the downward sloping curve. This is because the cost of debt is generally lower than the cost of equity, and as more debt financing is utilized, the overall cost of capital decreases. Therefore, the correct choice is D.

According to the Graph of WACC for Union Pacific, Which