Q1. The Chief Financial Officer (CFO) of a large manufacturing company is a member of the boards Risk Committee. During a regular meeting, the CFO said that the level of debt the company was carrying was a matter for concern. He said that this increased debt level is negatively impacting share value. Concerning the CFOs statement, is the CFO correct about the connection between debt level and share value? a) Yes. Because debt is a tax-deductible expense and is cheaper than equity, the more debt a company takes on, the higher the companys weighted average cost of capital (WACC). Therefore, shareholder value is decreased. b) No. Because debt is a tax-deductible expense and is cheaper than equity, there is no limit to how much companies can increase shareholder value by increasing the companys level of debt. C. Yes. Even though debt is a tax-deductible expense and is cheaper than equity, above a certain level, the more debt a company takes on, the more shareholders have to be compensated for the increased risk of default, and the companys weighted average cost of capital increases. d) No. The cost of debt and the cost of equity are the same so it does not matter what the companys debt-equity ratio is.