An Implicit Cost of Increasing the Proportion of Debt in a Firm's

question 27

Multiple Choice

An implicit cost of increasing the proportion of debt in a firm's capital structure is that:

• A)the firm's asset beta will increase.
• B)equity holders will demand a higher rate of return.
• C)the tax shield will not apply to the added debt.
• D)the equity-to-value ratio will decrease.

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Definitions:

Call Option

A call option is a financial contract that gives the buyer the right, but not the obligation, to buy an asset at a specified price within a predetermined period.

Stock Price

The present selling or buying price of a company's stock in the market.

Preferred Stock

A class of ownership in a corporation with a higher claim on its assets and earnings than common stock.

Par Value

A nominal or face value assigned to a share of stock by the company's charter, not necessarily reflecting its market value.