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

question 18

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:

Income Statement

A financial statement that shows a company's revenues, expenses, and profits over a specified period of time, indicating its financial performance.

Balance Sheet

An illustrative financial document that covers a company's assets, liabilities, and the equity interest of shareholders on a given date.

Statement of Stockholder's Equity

A financial statement that shows the changes in the value of a company's equity over a reporting period.

Balance Sheet

A detailed statement reflecting a company's tangible assets, owed liabilities, and shareholder equity at a particular time.