Question 18

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 costs of both debt, and equity. However, this action still may raise the company's WACC.

C) Increasing a company's debt ratio will typically increase the cost of debt, but decrease the cost of equity. This action may increase the company's WACC up to a certain point.

D) Since a firm's beta coefficient is not affected by its use of financial leverage, leverage does not affect the cost of equity.

E) None of the statements above is correct.