An Implicit Cost of Increasing the Proportion of Debt in a Firm's

question 92

Multiple Choice

An implicit cost of increasing the proportion of debt in a firm's capital structure is that:

• A) the firm's asset beta will increase.
• B) shareholders will demand a higher rate of return.
• C) the tax shield will not apply to the added debt.
• D) the equity-to-value ratio will decrease.

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Definitions:

OPEC

The Organization of the Petroleum Exporting Countries, an international cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market.

Oil Cartel

An association of oil-producing countries that agree to coordinate their oil production to control the price of oil on the global market.

Norway

A country in Northern Europe known for its vast coastlines, fjords, and extensive welfare system.

Economic Efficiency

A condition in which all resources are optimally distributed to serve each individual or entity in the best way while minimizing waste and inefficiency.