As Debt Is Substituted for Equity in the Capital Structure

question 115

Multiple Choice

As debt is substituted for equity in the capital structure and the debt ratio increases, the behavior of the overall cost of capital is partially explained by

• A) the reduction in risk as perceived by the common shareholders.
• B) the tax-deductibility of interest payments.
• C) the increase in the number of common shares outstanding.
• D) the decrease in the cost of equity.

---

Definitions:

Cost Effectiveness

An evaluation of the relative expenses involved in achieving a specific outcome, aiming for optimal results with minimal costs.

Employee Involvement Team

A group of employees tasked with collaborating on projects or challenges to improve workplace operations or culture.

Workplace Issues

Problems or concerns that arise in the work environment, affecting employees' performance, satisfaction, and overall company function.

Functional Chimney Problem

Issues arising from the organizational structure that result in departments or functions operating in silos, hindering interdepartmental communication and cooperation.