Which one of the following statements is correct? a)Because debt creates the tax shield, a firm's...

Which one of the following statements is correct?

		a)Because debt creates the tax shield, a firm's optimal capital structure is 100 percent debt.
		b)Equity become less risky when the degree of financial leverage increases because of the tax shield effect
		c)The risk of equity depends on both the degree of financial leverage and the riskiness of the firm's operations.
		d)WACC decreases as the debt-equity ratio increases.

Solutions

Expert Solution

Issuing more debt (ie increasing gearing), means that more debt will replace the expensive equity, this reduces the WACC.

thus the answer is:

d)WACC decreases as the debt-equity ratio increases.

jeff jeffy answered 1 year ago

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