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:

Direct Materials

Raw materials that are directly traceable to the production of a specific good or service.

Variable Overhead

Costs of operation that fluctuate with production volume, such as utilities for machinery.

Direct Labor-Hours

The cumulative amount of time employees spend specifically on the creation of goods or services.

Variable Overhead

Costs that fluctuate with production volume, such as utilities or indirect materials, which are not directly tied to any single product.