Which of the following correctly relates to levels of gearing, financial distress, and the cost of capital?
A) At low gearing, distress risks are low but the cost of capital is high.
B) At low gearing, distress risks are high and the cost of capital is high.
C) At high gearing, distress risks are low but the cost of capital is high.
D) At high gearing, distress risks are high and the cost of capital is high.

Question

Quizplus · Accepted Answer

At low gearing, a company uses less debt relative to equity, which minimizes financial distress risks but can lead to a higher cost of capital due to the higher cost of equity compared to debt.

Which of the Following Correctly Relates to Levels of Gearing