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:

Price of X

The cost at which a specific item or commodity, denoted as "X," is sold in the market.

Marginal Rate of Substitution

The exchange rate between goods that allows a consumer to trade off one product for another without altering their overall happiness.

Convex Preferences

A characteristic of consumer preference whereby a consumer prefers combinations or mixtures of goods over extreme amounts of single goods, displaying a preference for diversification.

Indifference Curve

A graph showing a combination of two goods that give a consumer equal satisfaction and utility, demonstrating the consumer's preference.