The cost of debt, rd, is normally less than rs, so rd (1 - T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd (1 - T). True False

Question

Tomas Williams

Business

14 March, 06:08

The cost of debt, rd, is normally less than rs, so rd (1 - T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd (1 - T). True False

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Amiah Morgan · Answer 1

True

Explanation:

Yest it is true that normally the cost of debt (rd) is less than the cost of equity or shares (rs). The shareholders are exposed of greater risk than the debt holder, because shareholders share the profit and losses as well, but the bond holders only gets a fix return on their fund.

If a firm is not completely debt fiance, which is a very rare case, the WACC is usually high than the rd (1 - T). The tax factor reduces the rd further. Taking average cost of capital using rd (1 - T) and rs, the result will be greater than rd (1 - T).