Question

If a firm increases its percentage of debt in its capital structure, what will happen to kcs, everything else being equal?

a. will increase, because expected cash-flow growth will be higher.
b. kcs will decrease, because the cost of debt is lower than the cost of equity.
c. kcs will increase, because the stock's beta will increase if the firm uses a higher percentage of debt.
d. kcs will decrease, because the stock's beta will decrease if the firm uses a higher percentage of debt.

Answer 1

C)kcs will increase, because the stock's beta will increase if the firm uses a higher percentage of debt.

Step-by-step explanation:

The capital structure an be regarded as

as the debt and the equity combination that a company engage in the finance of all their operation as well as growth. The debt do appear as a bond issues and can come as a loans while equity can appear as common stock, it can as well appear as retail earnings . It should be noted that If a firm increases its percentage of debt in its capital structure, what will happen to kcs, everything else being equal kcs will increase, because the stock's beta will increase if the firm uses a higher percentage of debt.