An implicit cost of adding debt to the capital structure is that it:
A) adds interest expense to the operating statement.
B) increases the required return on equity.
C) reduces the expected return on assets.
D) decreases the firm's beta.

Question

Quizplus · Accepted Answer

Adding debt increases the financial risk of a firm, which in turn increases the required return on equity as equity holders demand a higher return for the increased risk.

An Implicit Cost of Adding Debt to the Capital Structure