Holding All Other Things Equal, as the Relative Amount of Debt

question 29

Multiple Choice

Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will ____.

• A) increase
• B) decrease
• C) remain unchanged; there is no relationship between the two
• D) initially rise rapidly, then increase slowly beyond some point

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Definitions:

Required Return

The minimum return investors expect to receive on an investment, considering the risk associated with the investment.

Stock Price

The current price at which a share of a company can be bought or sold on the stock market.

Dividend Growth Rate

Dividend Growth Rate is the annualized percentage rate of growth of a company's dividend payments over time.

Investor's Return

The profit or loss realized on an investment over a specified period, often expressed as a percentage of the investment’s initial cost.