Which of the following statements is true concerning the relationship between the firm's cost of equity and its capital structure (as measured by the debt ratio)?
A) The exact relationship between the cost of equity and the debt ratio is difficult to determine.
B) The range of debt ratios where the cost of equity begins to increase rapidly varies by firm and industry depending on the firm's age.
C) The relationship is a saucer-shaped curve.
D) The relationship is determined by the static tradeoff theory.

Question

Quizplus · Accepted Answer

The exact relationship between the cost of equity and the debt ratio is difficult to determine because different firms have different cost structures, financial risk, and other factors that affect their cost of equity. Additionally, the cost of equity is highly subjective and varies depending on the assumptions and models used to estimate it. Therefore, it is difficult to establish a general relationship between the cost of equity and the debt ratio that applies to all firms.

Which of the Following Statements Is True Concerning the Relationship