As a Firm Increases Its Use of Debt Financing, What

question 8

Multiple Choice

As a firm increases its use of debt financing, what is the impact upon the cost of equity?

• A)The cost of equity decreases.
• B)The cost of equity remains the same.
• C)The cost of equity increases.
• D)None of the above.

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Definitions:

Magma Chamber

A region below a volcano where molten rock (magma) accumulates.

Molten Rock

Rock heated to a liquid state by extreme temperatures, found in the Earth's mantle and crust, also known as magma when underground and lava when it reaches the surface.

Underground Body

A general term for any substantial accumulation of material or geological structure located beneath the Earth's surface.

Pluton

A subsurface magma body or the mass of rock in which it solidifies; synonym: intrusion.