Asked by Prabha Karki on Jun 28, 2024
Verified
If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V," as opposed to a shallow "U," it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.
WACC
The weighted average cost of a company's capital from all sources, including equity and debt, used to evaluate investment possibilities.
Debt Ratio
The debt ratio measures a company's financial leverage by comparing its total liabilities to its total assets, indicating the proportion of a company's assets that are financed through debt.
Dividend
A portion of a company's earnings distributed to shareholders, usually in the form of cash or stock.
- Ascertain the objectives and repercussions of dividend approaches on enterprise value and the charges related to capital.
Verified Answer
SS
sydney sergotJun 30, 2024
Final Answer :
False
Explanation :
A sharp "V" shape indicates a higher WACC at low and high debt ratios, meaning that the cost of debt and equity is very high for the firm. This makes it harder for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year. A shallow "U" shape indicates a lower WACC at moderate levels of debt, making it easier for the firm to maintain a steady dividend.
Learning Objectives
- Ascertain the objectives and repercussions of dividend approaches on enterprise value and the charges related to capital.