The MCC Schedule Is Either Horizontal or Rising, Which Implies

question 7

Multiple Choice

The MCC schedule is either horizontal or rising, which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital. The rising section of the MCC schedule:

• A) is caused by economies of scale in financing.
• B) would be horizontal if the firm retained all of its earnings.
• C) results from a change in the debt ratio as the firm expands.
• D) occurs because the firm must, if it is to expand, be willing to take on riskier projects
• E) results from flotation costs associated with the sale of new common and preferred stock, along with higher debt costs, as the firm's rate of expansion increases.

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Definitions:

Future Cash Flows

Estimates of money expected to be received and paid out over future periods by a business.

Borrowing Terms

Conditions and agreements under which a loan is made, including interest rate, repayment schedule, and collateral requirements.

Dividends

A portion of a company's earnings distributed to its shareholders, often expressed as a fixed amount per share.

IFRS

International Financial Reporting Standards, a set of global accounting standards that guide the financial reporting of public companies.