If Interest Expense Lowers Taxes, Why Does the WACC Not

question 116

Multiple Choice

If interest expense lowers taxes, why does the WACC not decrease indefinitely with the addition of more debt?

• A) The tax shield effect of debt will result in a lower cost of equity.
• B) Increasing debt too much can result in a greater likelihood of firm failure (financial distress).
• C) A firm's common stock price will not be affected by the amount of debt a firm uses.
• D) Too much common equity increases the probability of bankruptcy.

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Definitions:

Controlling Function

The management activity that monitors performance, compares it with goals, and takes corrective action as needed.

Supervising

The act of overseeing, directing, and managing the work and performance of others, often in a workplace setting.

Developing People

Fostering growth and improvement in individuals within an organization through training, mentoring, and providing opportunities for professional development.

Technical Skill

Specific knowledge or expertise required to perform a particular task or job, usually involving methods, processes, or procedures.