The Weighted Average Cost of Capital (WACC) Declines as More

question 2

True/False

The weighted average cost of capital (WACC) declines as more of the lowest cost component is added.What limits a firm from using nearly all debt is that as the debt ratio rises, the absolute interest expense gets very large.The
large interest expense reduces income and results in a debt ratio limit even though the WACC continues to decline.

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Definitions:

Perfect Complements

Goods that are consumed together in fixed proportions, such that the consumer regards them as inseparable in use.

Income Effect

The change in an individual's or economy's purchasing power generated by a change in income, affecting the quantity demanded of a good or service.

Substitution Effect

The change in consumption patterns due to a shift in relative prices, leading consumers to substitute one product for another more affordable one.

Price Change

An adjustment in the cost of a good or service, which can be an increase or decrease from its previous amount.