Suppose the Debt Ratio (D/TA) Is 10 Percent, the Current

Multiple Choice

Suppose the debt ratio (D/TA) is 10 percent, the current cost of debt is 8 percent, the current cost of equity is 16 percent, and the tax rate is 40 percent. An increase in the debt ratio to 20 percent would decrease the weighted average cost of capital.

A) True
B) False
C) More information is needed to determine the effect on the WACC.