A company incorporates increasing amounts of debt finance into its capital structure, while leaving its operating risk unchanged. Assuming that a perfect capital market exists, with corporation tax (but without personal tax), which of the following correctly describes the effect on the company's costs of capital and total market value?

 a. Cost of equity: Increases; WACC: Decreases: Total market value: Unaffected

 b. Cost of equity: Increases; WACC: Decreases: Total market value: Increases

 c. Cost of equity: Decreases; WACC: Decreases: Total market value: Not available 

d. Cost of equity: 10%; WACC: Increases: Total market value: Decreases

Answer rating: 100% (QA)

The detailed answer for the above question is provided below The correct answer is b Cost of equity ... View the full answer