Which of the Following Statements Is FALSE

question 53

Multiple Choice

Which of the following statements is FALSE?

• A)With no debt,the WACC is equal to the unlevered equity cost of capital.
• B)With perfect capital markets,a firm's WACC is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered.
• C)As the firm borrows at the low cost of capital for debt,its equity cost of capital rises,but the net effect is that the firm's WACC is unchanged.
• D)Although debt has a lower cost of capital than equity,leverage does not lower a firm's WACC.

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Definitions:

M&M Proposition II

A theory in corporate finance stating that a firm's cost of equity increases with its level of debt, considering there are no taxes, transaction costs, or bankruptcy costs.

Financial Distress

Financial Distress occurs when an entity faces difficulties in meeting its financial obligations, often leading to insolvency or bankruptcy.

Leverage

Utilizing borrowed funds or debt to enhance the possible returns from an investment.