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    Debt to Equity Ratios

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    Why does the cost of equity increase with an increased use of debt in the capital structure?

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    When we look at total cost of equity, we're looking at the risk of ownership in a company. The cost of equity shows investors how risky it is to invest in the company, and includes the cost of ownership in the company. As the company incurs more and more debt, the risk associated with ownership in the company also increases. Basically, the more ...

    Solution Summary

    The solution discusses why the cost of equity increases with an increased use of debt in the capital structure.