Changing the Capital Structure by Adding Debt Will

question 55

Multiple Choice

Changing the capital structure by adding debt will:

• A) reduce the return that shareholders require.
• B) reduce default risk.
• C) increase debtholder risk.
• D) reduce the cost of debt.

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Definitions:

Marginal Cost Curve

A graphical representation showing how the cost of producing one more unit of a good or service changes as production volume increases.

Average Revenue

The amount of income generated per unit of sale or services rendered, calculated by dividing the total revenue by the number of units sold.

Total Revenue

The overall amount of money generated by a firm from selling its products or services, calculated as the quantity of goods sold multiplied by the price of the goods.

Perfectly Elastic

A situation where a small change in price leads to an infinite change in quantity demanded or supplied, depicted as a horizontal line on a graph.