The 'Traditional View' of Capital Structure Argues That

question 10

Multiple Choice

The 'traditional view' of capital structure argues that:

• A)a company's overall cost of capital can be reduced by financial leverage provided that the degree of leverage is not too great.
• B)the cost of capital is unaltered by using 'cheaper debt'.
• C)a company's cost of capital increases as more debt is used in its capital structure.
• D)a firm's value is independent of its capital structure.

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Definitions:

Equity Multiplier

A financial ratio indicating how much of a company's assets are financed by its shareholders' equity.

Debt-to-equity Ratio

This metric measures the relative contribution of shareholder equity and debt in the funding of a company's assets.

Dividend Yield Ratio

This ratio indicates the annual dividend payments of a company as a percentage of its current share price.

Earnings per Share

A financial ratio indicating the portion of a company's profit allocated to each outstanding share of common stock, showing the company's profitability per share.