Which of the Following Statements Is CORRECT

question 25

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.

---

Definitions:

Situation Analysis

An assessment method used to understand the internal and external factors affecting an organization's performance and strategy.

Break-Even Analysis

The process of calculating the break-even point, which equals the sales volume needed to achieve a profit of zero.

Profitability

The degree to which a business or activity yields profit or financial gain.

Organizational Structure

The system of tasks, workflows, reporting relationships, and communication channels that link together the diverse parts of an organization.