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1. As the fraction of debt financing in a firm increases ................... a. the cost of...

1. As the fraction of debt financing in a firm increases ...................

a. the cost of debt increases

b. the cost of equity increases

c. the cost of equity decreases

d. the cost of preferred stock decreases.

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Correct answer: b. the cost of equity increases

As the fraction of debt financing in a firm increases the cost of equity increases because increase of debt in capital structure of firm increases the financial risk of firm thus equity holders require a higher rate of return.

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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