Beginning with a Zero-Leverage Company, as Debt Is Substituted for Equity

Multiple Choice

Beginning with a zero-leverage company, as debt is substituted for equity in the capital structure ________.

A) the overall cost of capital first rises, reaches a maximum, and then declines
B) the overall cost of capital declines
C) the overall cost of capital first declines, reaches a minimum, and then rises
D) the overall cost of capital rises