Which of the following is NOT true about debt financing and the weighted average cost of capital?
A) Debt is usually the cheapest source of financing.
B) As the level of debt increases beyond the optimum capital structure, the cost of capital increases.
C) No debt in the firm's capital structure will minimize the firm's weighted average cost of capital.
D) None of these options are false.

Question

Quizplus · Accepted Answer

Debt financing can lower a firm's weighted average cost of capital (WACC) up to a certain point due to the tax deductibility of interest payments. However, having no debt at all would not minimize the WACC, as a mix of debt and equity often achieves the lowest WACC. This is because the cost of equity is generally higher than the cost of debt, and the tax shield provided by debt can reduce the overall cost of capital.

Which of the Following Is NOT True About Debt Financing