Which of the following statements is correct? a. since debt financing raises the firm's financial risk, increasing the target debt ratio will always increase the wacc. b. increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing. however, this action still may raise the company's wacc. c. since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its wacc. d. since a firm's beta coefficient is not affected by its use of financial leverage, leverage does not affect the cost of equity. e. increasing a company's debt ratio will typically increase the marginal costs of both debt and equity financing. however, this action still may lower the company's wacc.

E) Increasing a company's debt ratio will typically increase the marginal costs of both debt and equity financing. However, this action still may lower the company's WACC.

Explanation:

If the company's debt ratio is relatively low (0.4 or less), the cost of borrowing money will be relatively low, even lower than the cost of equity financing, which reduces the total WACC. But as the debt ratio increases (above 0.4), the marginal cost of the debt also increases, which increases the WACC. As the debt ratio approaches 0.6 (threshold that marks an unhealthy debt ratio), the marginal cost of debt and the rate of equity financing both increase, increasing the WACC.

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