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:

Title Passage

The point in time when the ownership (title) of goods passes from seller to buyer as per the terms of the sales contract.

Perpetual Inventory System

An accounting method that records goods transactions immediately through the use of computer systems, providing a continuous balance of inventory.

Cost Of Merchandise Sold

This is the total cost incurred to produce or acquire the goods sold by a company during a specific period.

Debit Balance

An account balance that occurs when the total amount of debits exceeds the total amount of credits in an account.