Which of the Following Statements Is (Are) True Concerning the Relationship

question 34

Multiple Choice

Which of the following statements is (are) true concerning the relationship between the firm's cost of equity and its capital structure (as measured by the debt ratio) ?

• A)The exact relationship between the cost of equity and the debt ratio is difficult to determine.
• B)The range of debt ratios where the cost of equity begins to increase rapidly varies by firm and industry depending on the firm's age.
• C)The relationship is a saucer-shaped curve.
• D)The relationship is determined by the static tradeoff theory.

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Definitions:

EBIT

A financial metric, Earnings Before Interest and Taxes, represents a company's earnings with all costs deducted except for interest and income taxes.

Debt Ratio

A financial ratio that measures the proportion of a company's total debt to its total assets, indicating its leverage level.

Operating Leverage

A measure of a company's fixed versus variable costs, indicating how a company's operating income changes in response to changes in sales volume.

Corporate Tax Rate

The rate at which a corporation is taxed on its income. This rate varies by country and sometimes within regions of a country.