The contribution of M&M comes from the fact that there is a constant trade-off ratio. Which of the statements below describe this constant trade-off ratio?
A) When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital remains constant.
B) When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital increases.
C) When a firm adds more low cost debt, it automatically increases the cost of equity so that the overall cost of capital decreases.
D) None of these
Answer: A
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