Which of the following statements is CORRECT? Since debt financing is cheaper th

Question

Which of the following statements is CORRECT? Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing; however, this action still may raise the company's WACC Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing; however, this action still may lower the company's WACC Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC

Explanation / Answer

Statement 2 is correct

Rest all are incorrect

Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing however this action still may raise the company's wacc

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