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Trade-Off Theory and Stock Dividend

According to the Trade-off Theory, which of the following statements is most correct?

1. Since debt financing raises the firm's financial risk, raising a company's debt ratio will always increase the company's WACC.
2. Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce the company's WACC.
3. Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing; however, it still may raise the company's WACC.
4. Statements a and c are correct.
5. None of the statements above is correct.

A stock dividend will

1. increase the total value of stockholders' equity.
2. decrease the total value of stockholders' equity.
3. not affect the total value of stockholders' equity.
4. change the total value of stockholders' equity but the direction
5. cannot be determined unless the market price and par value is known.

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The solution explains the answers to the two multiple choice questions about finance.

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