A Firm Has Determined Its Cost of Each Source of Capital

question 63

Multiple Choice

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt in the capital structure) , the weighted average cost of capital would

• A) increase.
• B) remain unchanged.
• C) decrease.
• D) not be able to be determined.

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Definitions:

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.

Capitalized Lease

A lease agreement accounted for as an asset and liability on the balance sheet, indicating ownership-like characteristics.

Lessee

The party in a lease agreement who obtains the right to use an asset in exchange for periodic lease payments.

Residual Value Guarantees

Promises made by lessees to lessors that the asset being leased will have a certain value at the end of the lease term.