Which of the following are true about the relation between debt and equity finan

ID: 2766405 • Letter: W

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.

The cost of debt is always less than the cost of equity. False. Not always but mostly it is true.

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

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

Highly levered firms do better in recessions than all equity firms. False. They do badly as debt payment is obligatory in nature

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

Increasing the tax rate will increase the cost of equity. False

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

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