Within Reasonable Parameters,if a Firm Increases Its Debt as a Proportion

question 35

Multiple Choice

Within reasonable parameters,if a firm increases its debt as a proportion of its capital structure:

• A)its overall cost of capital increases because the amount of interest it has to pay increases.
• B)WACC declines because of the tax advantage of debt.
• C)WACC increases because the proportion of interest to dividends increases.
• D)its costs increase because it is contractually required to pay interest,while dividends are paid in the firm's discretion.

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Definitions:

Direct Labor-Hours

The total hours worked by employees directly involved in the production of goods.

Direct Materials Cost

The cost of raw materials that are directly traceable to the production of a specific product.

Activity-Based Costing

A costing method that assigns costs to products or services based on the activities and resources required to produce them, aiming for more accurate cost allocation.

Direct Labor-Hours

The total hours of labor directly involved in manufacturing a product, which are often used to allocate manufacturing overhead costs to products.