General Studies · Capital Structure Theories
Which of the following is consistent with the traditional theory of Capital Structure?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A firm with low gearing can lower its WACC and increase its total value by increasing debt up to a certain optimal point.✓
- 2The cost of equity remains completely constant even with high gearing.
- 3The weighted average cost of capital (WACC) remains constant at all levels of gearing.
- 4The value of the firm decreases continuously with increased gearing.
Correct answer
A firm with low gearing can lower its WACC and increase its total value by increasing debt up to a certain optimal point.
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