An Implicit Cost of Adding Debt to the Capital Structure

question 93

Multiple Choice

An implicit cost of adding debt to the capital structure is that it:

• A) adds interest expense to the operating statement.
• B) increases the required return on equity.
• C) reduces the expected return on assets.
• D) decreases the firm's beta.

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Definitions:

Inventory Valuation

The determination of the value of a company's inventory using specific methods, such as FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), affecting financial statements.

FIFO Method

An inventory valuation method that assumes items purchased first are sold first, affecting the costs of goods sold and ending inventory.

Conversion Activity

The process of converting raw materials into finished goods through labor and manufacturing operations.

Equivalent Units

A concept used in process costing that converts partially completed units into a smaller number of fully completed units to simplify cost calculations.