When Corporate Taxes Are Considered, How Does Leverage Affect the WACC

question 58

Multiple Choice

When corporate taxes are considered, how does leverage affect the WACC?

• A)an increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged.
• B)changes in leverage will affect the WACC only if the interest rate on debt changes.
• C)increased leverage will increase the WACC.
• D)increased leverage will decrease the WACC.

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Definitions:

Undervalued

A financial term referring to an asset or security whose price is perceived to be less than its intrinsic or fair value.

Compromise Dividend Policy

A dividend policy that seeks a balance between keeping shareholders happy with regular dividends and reinvesting earnings into the company.

Dividends

Payments made by a corporation to its shareholder members, usually derived from the company's profits.