Which of the Following Statements Best Describes WACC

question 81

Multiple Choice

Which of the following statements best describes WACC?

• A)Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
• B)Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
• C)Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
• D)Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.

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Definitions:

Variable Overhead Efficiency Variance

The difference between the actual and expected (or standard) use of variable overheads based on the actual activity levels.

Variable Manufacturing Overhead

The portion of manufacturing overhead costs that varies directly with the level of production, such as utility costs for machinery.

Particular Product

Refers to a specific item or product line that a company manufactures or sells.

Variable Overhead Rate Variance

The difference between the actual variable overhead incurred and the expected variable overhead, based on a predetermined rate.