Question

According to traditional approach the average cost of capital ________________________________.

• A. Remains constant up to a degree of leverage and rise sharply thereafter with even increase in leverage
• B. Rises constantly with increase in leverage
• C. Decreases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point
• D. Decreases at an increasing rate with increase in leverage
• E. Increase up to certain point remains constant for moderate decrease in leverage and decreases beyond a certain point.

Answer 1

Answer: (C)

Decreases up to a certain point, remains unchanged for moderate increase in leverage and rises beyond a certain point

According to the traditional approach the average cost of capital K${}_0$ as a consequence of a behaviour of K${}_e$ and K${}_d$, decreases up to a certain point remains more or less unchanged for moderate increases in leverage thereafter and rises beyond a certain point.