1. As the fraction of debt financing in a firm increases ................... a. the cost of...
1. As the fraction of debt financing in a firm increases ...................
a. the cost of debt increases
b. the cost of equity increases
c. the cost of equity decreases
d. the cost of preferred stock decreases.
Homework Answers
Correct answer: b. the cost of equity increases
As the fraction of debt financing in a firm increases the cost of equity increases because increase of debt in capital structure of firm increases the financial risk of firm thus equity holders require a higher rate of return.
Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
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