If a Company's Cost of Capital Is Less Than the Required

question 107

Multiple Choice

If a company's cost of capital is less than the required return on equity,then the firm:

• A) is financed with more than 50% debt.
• B) is perceived to be safe.
• C) has debt in its capital structure.
• D) cannot be using any debt.

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Definitions:

Open Account

a method of credit where the seller ships goods or provides services to a buyer under an agreement to bill them later or on a recurring basis.

Assets

Resources owned by a business, expected to bring future economic benefits.

Liabilities

Debts or financial responsibilities that a business has to other entities, requiring repayment over a period through the exchange of economic resources such as cash, products, or services.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities, essentially representing the owner's claim against the company's assets.