Beginning with a Zero-Leverage Company, as Debt Is Substituted for Equity

question 101

Multiple Choice

Beginning with a zero-leverage company, as debt is substituted for equity in the capital structure ________.

• A) the overall cost of capital first rises, reaches a maximum, and then declines
• B) the overall cost of capital declines
• C) the overall cost of capital first declines, reaches a minimum, and then rises
• D) the overall cost of capital rises

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Definitions:

Oligopoly

A market structure characterized by a small number of firms controlling a large portion of the market share, often leading to limited competition.

Market Shares

The segment of the market in which a particular company or product holds dominance.

Competitive Spectrum

The range of competition in a market, varying from monopolies to perfect competition.

Cartel

An agreement among competing firms to control prices or exclude entry of a new competitor in the market, often to maximize their own profits at the expense of consumers.