WACC and the debt/total asset ratio
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Assume everything is held constant, which of the following statements best describes the relationship between rs, (1-T)rd, WACC, and the debt total asset ratio?
a. rs, (1-T)rd, and WACC all increase whenever the debt/total asset ratio rises.
b. rs, (1-T)rd and WACC all decrease whenever the debt/total asset ratio rises.
c. rs and (1-T)rd increase, but WACC decreases when the debt/total asset ratio rises.
d. rs, and (1-T)rd increase, while WACC first increases and then decreases as the debt/total asset ratio rises.
e. rs and (1-T)rd increase, while WACC first decreases and then increases as the debt/total asset ratio rises.
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Solution Summary
This short article helps to describe the relationship between the cost of debt, cost of equity, weighted average cost of capital (WACC) and the debt total asset ratio.
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