Which of the following statements is CORRECT? * In most cases, increasing a company's debt ratio raises the marginal cost of both debt and equity funding. However, this action could also reduce the company's WACC. Since debt funding is less costly than equity financing, rising a company's debt ratio would often lower its WACC. Since the use of financial leverage has no impact on a firm's beta coefficient, leverage has no effect on the cost of equity. Since debt funding increases a company's financial risk, raising its debt ratio will often increase its WACC. In most situations, rising a company's leverage ratio reduces the marginal cost of both debt and equity funding. However, this behavior could increase the company's WACC.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Which of the following statements is CORRECT? *
In most cases, increasing a company's debt ratio raises the marginal cost of both
debt and equity funding. However, this action could also reduce the company's WACC.
Since debt funding is less costly than equity financing, rising a company's debt ratio
would often lower its WACC.
Since the use of financial leverage has no impact on a firm's beta coefficient, leverage
has no effect on the cost of equity.
Since debt funding increases a company's financial risk, raising its debt ratio will
often increase its WACC.
In most situations, rising a company's leverage ratio reduces the marginal cost of
both debt and equity funding. However, this behavior could increase the company's
WACC.
Transcribed Image Text:Which of the following statements is CORRECT? * In most cases, increasing a company's debt ratio raises the marginal cost of both debt and equity funding. However, this action could also reduce the company's WACC. Since debt funding is less costly than equity financing, rising a company's debt ratio would often lower its WACC. Since the use of financial leverage has no impact on a firm's beta coefficient, leverage has no effect on the cost of equity. Since debt funding increases a company's financial risk, raising its debt ratio will often increase its WACC. In most situations, rising a company's leverage ratio reduces the marginal cost of both debt and equity funding. However, this behavior could increase the company's WACC.
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