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    Which is most correct according to the Trade-off Theory?

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

    A Since debt financing raises the firm's financial risk, raising a company's debt ratio will always increase the company's WACC.

    B Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce the company's WACC.

    C 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.

    D Statements a and c are correct.

    E None of the statements above is correct.

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    Solution Summary

    The question is answered in a couple of sentences which include a caveat.