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:

Interest Expense

The cost incurred by an entity for borrowed funds, which is charged as an expense on the income statement over the period the funds are borrowed.

Effective Interest Method

An accounting practice used to allocate interest expense or income over the life of a financial instrument at a constant interest rate.

Reversing Entries

Journal entries made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.

Premium on Bonds Payable

Premium on Bonds Payable refers to the amount by which the bond's selling price exceeds its face value or par value.