Which of the following statements about the cost of capital is CORRECT ?

Select one:

a. Both the cost of debt and equity financing will decrease when a firm expands into a risky new area.

b. Both the cost of debt and equity financing will decrease when a nuclear plant company encounters a ban on nuclear power generation in certain states.

c. The WACC of a firm will decrease when investors become more risk averse.

d. Both the cost of debt and equity financing will decrease when a firm increases its debt/asset ratio.

e. Both the cost of debt and equity financing will increase when the Federal Reserve tightens credit.

Expert Solution

The correct option is "E".

Ad the Federal Reserve will increase the rate, so the cost of debt will increase. As the interest burden of the company will increase so the shareholders will be more worried as the dividend is paid after interest, so the cost of equity will also increase.

jeff jeffy answered 2 years ago

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