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.

Question

Quizplus · Accepted Answer

Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing due to higher financial risk. However, using debt financing can also result in tax benefits, which can lower the company's overall WACC. So, it still may lower the company's WACC even with higher marginal costs of both debt and equity financing.

Which of the Following Statements Is CORRECT