The most commonly held view of capital structure,according to the text,is that the weighted average cost of capital
A) First falls with moderate levels of leverage and then increases.
B) Does not change with leverage.
C) Increases proportionately with increases in leverage.
D) Increases with moderate amounts of leverage and then falls.
E) None of the above.

Question

Quizplus · Accepted Answer

The most commonly held view of capital structure, as per the Modigliani-Miller theorem with taxes, is that the weighted average cost of capital (WACC) first decreases with moderate levels of leverage due to the tax shield benefits of debt. However, as leverage continues to increase beyond a certain point, the WACC begins to increase due to the rising costs of financial distress and bankruptcy risks associated with high levels of debt.

The Most Commonly Held View of Capital Structure,according to the Text,is