Which two words correctly complete the following statement: "Financial distress and agency costs eventually outweigh the lower cost of debt as gearing rises causing the WACC to and the firm's value to _."?
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question

Quizplus · Accepted Answer

As gearing (debt-to-equity ratio) rises, financial distress and agency costs increase. These factors outweigh the lower cost of debt, causing the weighted average cost of capital (WACC) to rise, and ultimately leading to a decrease in the firm's overall value.

Which Two Words Correctly Complete the Following Statement: "Financial Distress