Question

Which of the following are true about the relation between debt and equity financing? (choose all that apply)

The cost of debt is always less than the cost of equity.

The cost of equity always decreases as the debt-to-equity ratio increases.

Increasing the use of debt does not always decrease the weighted average cost of capital.

Highly levered firms do better in recessions than all equity firms.

Increasing the tax rate will increase the value of the interest tax shield but lower the value of equity.

Increasing the tax rate will increase the cost of equity.

According to the Pecking order hypothesis, increasing the tax rate will cause firms to issue more debt.

Answer 1

Statements which are true between the relationship of debt and equity financing are,-

(C). Increasing the use of of debt does not always decrease the weighted average cost of capital because there would be times when increase of debt will be leading to increase of cost of capital

(E) increasing the value of tax rate will be increasing the overall value of interest tax shield but lower the value of equity because interest payable are tax deductible

all the other statements are false and they are not reflecting the true relationship between equity capital and debt capital.

answered by: anonymous