Assertion (A): Arbitrage keeps the cost of capital constant despite change in the capital structure. Reason (R): It ensures compensating inverse change in cost of equity capital with a change in the cost of debt capital.

The correct answer is: (A) and (R) both are true and (R) is the correct explanation of (A).

Arbitrage is the simultaneous purchase and sale of an asset in different markets or in different forms in order to profit from a difference in the price. In the context of capital structure, arbitrage ensures that the cost of capital is constant despite changes in the capital structure. This is because investors will arbitrage away any differences in the cost of capital between different capital structures. For example, if the cost of equity capital is lower than the cost of debt capital, investors will borrow money and use it to purchase shares in the company. This will increase the demand for shares and drive up the price of shares. This will, in turn, increase the cost of equity capital. Conversely, if the cost of debt capital is lower than the cost of equity capital, investors will sell shares in the company and use the proceeds to repay debt. This will decrease the demand for shares and drive down the price of shares. This will, in turn, decrease the cost of equity capital.

Therefore, arbitrage ensures that the cost of capital is constant despite changes in the capital structure. This is because investors will arbitrage away any differences in the cost of capital between different capital structures.

The reason (R) is the correct explanation of the assertion (A) is because it explains how arbitrage ensures that the cost of capital is constant despite changes in the capital structure.