Which of the Following Statements Is Most Correct

question 46

Multiple Choice

Which of the following statements is most correct?

• A) The optimal capital structure minimizes the WACC.
• B) If the after-tax cost of equity financing exceeds the after-tax cost of debt financing,firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
• C) Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing.
• D) Answers a and c are both correct.
• E) Answers b and c are both correct.

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Definitions:

Dividend Policy

The strategy a company uses to decide how much it will pay out to shareholders in dividends.

Cash Flow Projections

Forward-looking estimates of the cash inflows and outflows over a certain period, used for budgeting and financial planning purposes.

Discounted Free Cash Flow

Discounted Free Cash Flow is a valuation method that calculates the present value of a company's expected cash flows after taking into account the time value of money and risk.

Zero-Growth Perpetuity

A type of financial model used to value an asset that is expected to generate a consistent, never-ending stream of cash flows with zero growth rate.