Consider the Following Equation for the Question(s)below

question 15

Multiple Choice

Consider the following equation for the question(s) below:
E + D = U = A
-Which of the following statements is FALSE?

• A)With no debt, the WACC is equal to the unlevered equity cost of capital.
• B)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.
• C)With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered.
• D)Although debt has a lower cost of capital than equity, leverage does not lower a firm's WACC.

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Definitions:

Compounded Semi-Annually

Interest on an investment or loan that is calculated twice a year and then added to the principal, affecting the overall amount on which future interest is based.

Payment

A transfer of money or goods from one party to another in exchange for goods, services, or to fulfill a legal obligation.

Compound Annual Return

The rate at which an investment grows annually over a specified period, taking into account the effect of compounding.

Diversified Canadian Equity Funds

Investment funds that spread their holdings across a wide range of Canadian stocks to mitigate risk and maximize returns.