The initial impact of increasing the use of debt for a firm which had no prior debt financing is to:
A) lower the cost of capital
B) lower the weight of the debt component
C) increase the cost of capital
D) lower the cost of retained earnings

Question

Quizplus · Accepted Answer

The initial impact of increasing the use of debt for a firm which had no prior debt financing is to lower the cost of capital. This is because debt financing often comes with lower interest rates compared to the cost of equity, and interest payments are tax-deductible, which can reduce the overall cost of capital for the firm.

The Initial Impact of Increasing the Use of Debt for a Firm