Which of the Following Statements Is CORRECT

question 36

Multiple Choice

Which of the following statements is CORRECT?

• A) since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its wacc.
• B) 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.
• C) 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.
• D) since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
• E) since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its wacc.

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Definitions:

Debt-equity Ratio

An indicator that differentiates the financing portion between debt and equity for company assets.

External Financing

Funds a company acquires from outside sources, such as bank loans, issuing bonds, or selling stock, to support its operations and growth initiatives.

Full Capacity

Full capacity refers to the maximum level of output that a company can sustain over a period, utilizing all available resources efficiently.

External Financing Needed

The amount of funding a company must seek from outside sources to finance its planned activities when internal cash flow is insufficient.