A fiRm Currently Has a Debt-Equity Ratio of

question 139

Multiple Choice

A firm currently has a debt-equity ratio of .50, an after-tax cost of debt of 8%, and a cost of equity of 12%. The firm changes its debt-equity ratio to .40, all else constant. This change will:

• A) Increase the total debt level of the firm.
• B) Decrease the firm's WACC.
• C) Increase the cost of equity financing.
• D) Cause the NPV of projects under consideration to decrease.
• E) Not affect the firm's capital budgeting decisions.

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Definitions:

Regressive Tax

A tax system where the tax rate decreases as the taxable amount increases, placing a higher burden proportionally on lower-income earners.

Tax Schedules

Detailed tables or lists provided by tax authorities that outline the tax rates applicable to various levels of taxable income.

Taxable Income

The amount of an individual’s or corporation's income used to calculate how much tax they owe to the government, after deductions and exemptions.

Price Elasticities

Measures of the sensitivity of the quantity demanded or supplied of a good to a change in its price.