Which of the Following Statements Is CORRECT

question 20

Multiple Choice

Which of the following statements is CORRECT?

• A) Since debt financing raises the firm's financial risk,increasing the target debt ratio will always increase the 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 costs 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 costs of both debt and equity financing.However,this action still may lower the company's WACC.
• E) Since a firm's beta coefficient is not affected by its use of financial leverage,leverage does not affect the cost of equity.

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Definitions:

Maturity

The state of being fully developed in body or mind, often associated with adult behavior or thinking.

Attentiveness

The quality of paying close attention to something or someone, showing alertness and focus.

Caudal

Pertaining to the tail or the posterior part of the body.

Cephalic

Pertaining to the head or the cranial region of the body.