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For firms with relatively high levels of debt in perfect capital markets (no taxes, no costs...

For firms with relatively high levels of debt in perfect capital markets (no taxes, no costs of financial distress), the cost of capital is closer to the cost of debt capital than to the cost of equity capital.

True

False

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Answer #1

ANSWER

- CORRECT ANSWER : TRUE

- EXPLANATION :

  • The Overall cost of Capital of a Firm is the Weighted Average Cost of Capital .
  • So in case of Perfect Capital Markets where there are No taxes and No other transaction cost , the cost of debt itself becomes the final Cost of Debt (ie after taxes) without any change.
  • So in such a case when we will increase the Weight of Debt in the Capital Structure of the Firm, the Overall Cost will start getting closer to the Cost of Debt itself due to its higher weight.
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