Which of the Following Statements Is CORRECT

question 20

Multiple Choice

Which of the following statements is CORRECT?

• A) Since debt financing raises the firm's financial risk,increasing the target debt ratio will always increase the 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 costs 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 costs of both debt and equity financing.However,this action still may lower the company's WACC.
• E) Since a firm's beta coefficient is not affected by its use of financial leverage,leverage does not affect the cost of equity.

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Definitions:

Warranty Disclaimers

Legal statements that limit or eliminate the seller's liability for certain defects or failures in the product sold.

UCC Sections

Defined portions of the Uniform Commercial Code, a set of laws regulating commercial transactions and business dealings in the United States.

Unconscionability Standards

Legal criteria used to evaluate if a contract or term is so unfair or oppressive to one party that it cannot be ethically enforced.

Breach of Warranty

The failure to meet the terms of a promise or guarantee made about the quality or condition of a product or service.