Which of the Following Statements Is CORRECT

question 25

Multiple Choice

Which of the following statements is CORRECT?

• A)Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
• B)Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
• C)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.
• D)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.
• E)Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.

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Definitions:

Due Diligence

A rigorous process that involves evaluating an investment opportunity prior to the contract being signed.

Investment Opportunity

A situation, asset, or project that promises future financial returns, involving potential for profit as well as risk of loss.

Deal

An agreement or an arrangement, often in a business context, that specifies terms between parties for transactions, collaborations, or partnerships.

Entrepreneurs

Individuals who organize and operate businesses, taking on greater than normal financial risks in order to do so.