If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Question

Quizplus · Accepted Answer

A sharp "V" shape curve indicates that even small changes in the firm's debt ratio will lead to a significant change in the WACC. This means that it will be more difficult for the firm to maintain a stable dividend, as its cost of capital will fluctuate greatly with changes in the debt ratio. On the other hand, a shallow "U" shape curve indicates that the WACC is relatively stable over a range of debt ratios, making it easier for the firm to maintain a consistent dividend.

If the Shape of the Curve Depicting a Firm's WACC