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Stock Price Changes as Firm's Debt Becomes Successively Higher

If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?

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ANSWERS

First, the optimal capital structure of a company is the mix of debt and equity that results to the lowest weighted average cost of capital.

Second, if a firm goes from zero debt to ...

Solution Summary

The solution examines the stock price changes as firm's debt become successively higher. The expert determines why the expert would expect its stock price to rise first and then high a peak, and then begin to decline.

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