As Debt Is Substituted for Equity in the Capital Structure

question 139

Multiple Choice

As debt is substituted for equity in the capital structure and the debt ratio increases, the behavior of the overall cost of capital is partially explained by ________.

• A) the tax-deductibility of interest payments
• B) the increase in the number of common shares outstanding
• C) the reduction in risk as perceived by the common shareholders
• D) the decrease in the cost of equity

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