As leverage debt load rises the cost of equity Question 12 o

As leverage (debt load) rises the cost of equity:

Question 12 options:

Rises

Falls

Remains unchanged

Cannot be determined

Solution

Correct option is > Rises

Cost of equity rises when we increase the debt to a capital structure. This happens because the equity return enhances and return on equity is considered cost of equity. Increasing leverage decreased weight average cost for the firm.