An Implicit Cost of Adding Debt to the Capital Structure

question 3

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:

Shares

Portions of ownership in a corporation, representing a claim on part of its assets and earnings.

Dividend Yield

A financial ratio indicating how much a company pays out in dividends each year relative to its stock price, used by investors to gauge return on investment.

Dividend Income

Income received from owning shares of a company, distributed from the company's earnings.

Shares

Financial instruments representing ownership in a corporation or asset, designed to split dividends equally among holders when profits are made.