As Debt Is Substituted for Equity in the Capital Structure

question 126

Multiple Choice

As debt is substituted for equity in the capital structure and the debt ratio increases, all of the following statements about the component costs of capital are true EXCEPT

• A) the cost of equity continually increases.
• B) the cost of debt continually increases.
• C) the overall cost of capital first declines, reaches a minimum, and then rises again.
• D) the overall cost of capital continually increases.

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Definitions:

Shadows And Lighting

The play of light and darkness, which can affect visual perception and the ambiance of a space.

Context Effects

The influence of environmental factors on one's perception, interpretation, or behavior in any given situation.

Top-Down Processing

A cognitive process where perception begins with the brain applying what it knows and expects to perceive and then works downward to the finer details.

Good Continuation

A principle of Gestalt psychology that states elements tend to be grouped together if they follow in the same direction or pattern, creating a perception of continuity.