Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: According to the Traditional Approach to capital structure, a firm's overall Weighted Average Cost of Capital (WACC) initially declines with the addition of moderate leverage but eventually rises as debt becomes excessive. Reason R: Beyond a specific threshold, the excessive use of debt increases financial risk to such an extent that it causes both the cost of equity (Ke) and the cost of debt (Kd) to rise sharply, thereby offsetting the benefits of low-cost debt. In the light of the above statements, choose the most appropriate answer from the options given below:

Question

General Studies · Capital Structure Theories

Verified Solution4 OptionsUpdated: October 2026👁️1 View

Share:

Correct answer

Both A and R are correct and R is the correct explanation of A

Save this question and verified answer as a clean study sheet with live clickable link.

👥

Challenge your peer aspirants on WhatsApp or Telegram to solve this question!

Online Test Series

Practice full-length mock tests with real exam timers, instant score analysis, and all-India ranking.

Chapter Practice

Want more practice questions on Capital Structure Theories?

Solve complete topic-wise tests with detailed solutions on GkGet.

Recommended practice questions in General Studies · Capital Structure Theories

Which movement aimed to promote Khadi, a hand-spun and handwoven cloth native to India?

Who were prominent leaders associated with the initial phase of the Telangana Rebellion (1946-1951) against the Nizam's rule and feudal landlords?

What was the immediate trigger for the Revolt of 1857?

Answer 1

Both A and R are correct and R is the correct explanation of A

Answer 2

Both A and R are correct but R is NOT the correct explanation of A

Answer 3

A is correct but R is not correct

Answer 4

A is not correct but R is correct

Related Practice Questions