A company is considering changing its capital structure by increasing its debt ratio from 40% to 55%. What is the likely impact on the company's…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2024
A company is considering changing its capital structure by increasing its debt ratio from 40% to 55%. What is the likely impact on the company's cost of equity, assuming all other factors remain constant?
(A) Cost of equity will be unaffected by debt ratio
(B) Cost of equity will remain unchanged
(C) Cost of equity will decrease
(D) Cost of equity will increase

Suggested Answer and Working Notes:

Correct Answer: Option (D)

Cost of equity will increase

Topics: Part-A: Financial Management

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