If Interest Expense Lowers Taxes,why Does the WACC Not Decrease

question 47

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 ordinary share price will not be affected by the amount of debt a firm uses.
• D)Too much ordinary equity increases the probability of bankruptcy.

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Definitions:

Shang Bronzes

Ancient Chinese bronze artifacts, primarily ritual vessels and weaponry, produced during the Shang dynasty (circa 1600–1046 BCE).

Kofun Period

An era in Japanese history (approximately 3rd to 6th centuries CE) characterized by the construction of large tomb mounds known as kofun.

Sarcophagi

Stone coffins, typically adorned with sculptures and inscriptions, used primarily in ancient civilizations for the burial of the dead.

Haniwa

Sculpted fired pottery cylinders, modeled in human, animal, or other forms and placed on Japanese tumuli of the Kofun period.