An Implicit Cost of Adding Debt to the Capital Structure

question 93

Multiple Choice

An implicit cost of adding debt to the capital structure is that it:

• A) adds interest expense to the operating statement.
• B) increases the required return on equity.
• C) reduces the expected return on assets.
• D) decreases the firm's beta.

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Definitions:

Plantwide Predetermined

A single overhead rate calculated for an entire production facility based on estimated costs and activity levels.

Machine-Hours

A measure of the amount of time a machine is operated, used in allocating machine costs to units of production.

Predetermined Overhead Rate

An estimated rate used to allocate manufacturing overhead to individual products or job orders based on a certain activity base, such as machine hours or labor hours.

Machine-Hours

A unit of measure that represents the operational time of a machine, used in allocating manufacturing overhead based on the time machines are run.