A firm in a cyclical industry should use
A) a large amount of debt to lower the cost of capital.
B) no debt at all.
C) preferred stock in place of debt.
D) a limited amount of debt to lower the cost of capital.

Question

Quizplus · Accepted Answer

A firm in a cyclical industry should use a limited amount of debt to lower the cost of capital. Too much debt can increase financial risk and potentially lead to bankruptcy during downturns. However, having some debt can lower the cost of capital and allow the firm to invest in growth opportunities. Preferred stock is not a viable substitute for debt as it still represents an obligation to pay dividends and has a higher cost of capital compared to debt. No debt at all is not practical as it would limit the firm's ability to invest and potentially hinder growth.

A Firm in a Cyclical Industry Should Use