Describes the impact of the change in leverage

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Problem 1: Hohokam Ltd. is considering increasing its amount of debt and buying back equity. Its current debt-to-equity (D/E) ratio is 0.75 and it has decided to increase its D/E ratio to 1.20 to be more in line with leverage ratios of peers in its industry. The company considers 1.20 to be its optimal capital structure. Based on capital structure theory, which of the following best describes the impact of this change in leverage with respect to weighted average cost of capital (WACC) and cost of equity for Hohokam?

a) WACC will decrease and the cost of equity will increase.
b) WACC and the cost of equity will increase.
c) WACC will increase and the cost of equity will decrease.
d) WACC and the cost of equity will decrease.

Reference no: EM132887452

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