Which of the Following Is a True Statement

question 49

Multiple Choice

Which of the following is a true statement?

• A) A firm's cost of debt increases with the use of equity in the capital structure.
• B) A firm's cost of equity increases with the use of equity in the capital structure.
• C) A firm's cost of equity increases with the use of debt in the capital structure.
• D) A firm's cost of equity decreases with the use of debt in the capital structure.

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Definitions:

Common Stock

Equity securities representing ownership in a corporation, providing voting rights, and a dividend claim on earnings.

Cumulative Nonparticipating Preferred Stock

Preferred stock that accumulates unpaid dividends, which must be paid out before dividends can be distributed to common stockholders, but does not participate beyond the fixed dividend.

Cash Dividends

A redistributive payment of a portion of a company's earnings, made in cash, to its shareholders.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, equal to the share capital plus retained earnings.