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

---

Definitions:

Ice Cream Sundaes

A dessert consisting of one or more scoops of ice cream topped with sauce or syrup, and often other toppings such as whipped cream, nuts, or cherries.

Successively Less Satisfaction

The phenomenon where each additional unit of a particular good or service consumed provides less satisfaction or utility than the previous one; also known as diminishing marginal utility.

Quantity Demanded

The amount of a product that consumers are willing and able to purchase at a given price level.

Coca Cola

A multinational beverage corporation, known for its flagship product, a carbonated soft drink named after the company.