Which statement about capital structure is the most correct?

a.

Lenders rank ahead of shareholders when the company goes bankrupt. This increased risk for shareholders means the cost of equity is higher than the cost of debt.

b.

Because the cost of debt is cheaper than the cost of equity, a company should use as much debt as possible to finance their projects

c.

A company should always try to reduce its debt because of the high bankruptcy risk associated with debt. A company should aim to have 100% equity financing if it is possible.

d.

The more the company borrows, the lower will be the after-tax WACC. This increases the present value of the firm free cash flows which represents the value of the levered firm. Therefore, a firm should always seek to borrow as much debt as possible.

e.

The more the company borrows, the higher will be its tax shields, therefore a company will always prefer to issue debt than equity.

Clear my choice