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:

Attribution

The process of explaining one’s own behavior and the behavior of others.

Basic Necessities

Fundamental needs required for sustaining human life, including food, water, shelter, and clothing.

Poverty

A state or condition in which a person or community lacks the financial resources and essentials for a minimum standard of living.

Solomon Asch

A psychologist known for his research on conformity, including the Asch conformity experiments.