As Debt Is Substituted for Equity in the Capital Structure

question 51

Multiple Choice

As debt is substituted for equity in the capital structure and the debt ratio increases, all of thefollowing statements about the component costs of capital are true EXCEPT

• A) the cost of debt continually increases.
• B) the overall cost of capital continually increases.
• C) the cost of equity continually increases.
• D) the overall cost of capital first declines, reaches a minimum, and then rises again.

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Definitions:

Symmetrical Area

A region in a distribution curve where data are evenly distributed on both sides of a central point, indicating balance and uniformity.

Z Score

Another term for Z-score, indicating how far, in standard deviations, a data point is from the average of a set of data.

Standard Normal Random Variable

Represents a normal distribution with a mean of zero and a standard deviation of one, used in many statistical applications.

Area

The extent of a surface or piece of land, measured in square units.