An implicit cost of increasing the proportion of debt in a firm's capital structure is that:

Name: An implicit cost of increasing the proportion of debt in a firm's capital structure is that:
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Question

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Shareholders will demand a higher rate of return when the proportion of debt in a firm's capital structure increases. This is because as the level of debt increases, the risk associated with the firm's equity also increases. Shareholders demand higher returns to compensate for the increased risk.

An Implicit Cost of Increasing the Proportion of Debt in a Firm's