The 'traditional view' of capital structure argues that:
A)a company's overall cost of capital can be reduced by financial leverage provided that the degree of leverage is not too great.
B)the cost of capital is unaltered by using 'cheaper debt'.
C)a company's cost of capital increases as more debt is used in its capital structure.
D)a firm's value is independent of its capital structure.

Question

Quizplus · Accepted Answer

The 'traditional view' of capital structure argues that a company's overall cost of capital can be reduced by financial leverage provided that the degree of leverage is not too great. This means that the cost of capital can be lowered by using debt, but not to a point where the risk posed by the increased leverage offsets any benefits gained from the reduced cost of capital.

The 'Traditional View' of Capital Structure Argues That