According to the Graph of WACC for Union Pacific, Which

question 42

Multiple Choice

According to the graph of WACC for Union Pacific, which of the following is (are) true?

• A)The cost of equity is an increasing function of the debt-equity ratio.
• B)The cost of equity is an increasing function of the debt-equity ratio, and the cost of debt is an increasing function of the debt-equity ratio.
• C)The weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.
• D)The cost of equity is an increasing function of the debt-equity ratio, the cost of debt is an increasing function of the debt-equity ratio, and the weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.

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Definitions:

Covered Interest Arbitrage

A strategy in which an investor uses a forward contract to hedge against exchange rate risk when investing in foreign interest-bearing instruments.

Nominal Risk-Free Rate

The rate of return on the safest investments, such as government bonds, without adjusting for inflation.

Forward Rate

The future interest rate agreed upon in a forward contract, which is a derivative financial instrument.

Covered Interest Arbitrage

An investment strategy where an investor takes advantage of the interest rate differential between two countries while hedging exchange rate risk.