If a Firm Chose to Increase Its Debt Ratio from 20

question 7

Multiple Choice

If a firm chose to increase its debt ratio from 20% to 40%, what is the potential risk?

• A) The average cost of capital would most likely rise.
• B) The price of the firm's common stock would definitely decline.
• C) If economic forces cause a reduction of sales, the firm's EPS might decline.
• D) The firm's WACC might decline.

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Definitions:

Doomsday Forecasts

Predictions suggesting catastrophic events leading to widespread destruction or significant societal collapse.

Government Regulation

refers to laws, rules, or directives imposed by government bodies to regulate and control the activities of businesses and individuals within an economy.

Conservation

The prevention of wasteful use of resources, or the protection and preservation of the natural environment, heritage, or culture.

Resource Economists

Specialists who study the allocation, utilization, and conservation of natural resources from an economic perspective.