Which statements about capital structure is correct

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Problem 1: Which of the following statements about capital structure and the WACC is CORRECT?

Option 1: Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.

Option 2: Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.

Option 3: Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.

Option 4: Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.

Reference no: EM132933996

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