The correct answer is: A. Increases.
The cost of debt is the interest rate that a company pays on its outstanding debt. It is a major component of a company’s overall cost of capital, and it has a significant impact on the company’s profitability.
The cost of debt is determined by a number of factors, including the company’s credit rating, the maturity of the debt, and the prevailing interest rates. However, the most important factor is the company’s debt proportion.
The debt proportion is the percentage of a company’s capital that is financed by debt. A higher debt proportion means that a company is more leveraged, and it is therefore more risky for lenders. As a result, lenders will charge a higher interest rate on debt to companies with a higher debt proportion.
This is because a company with a higher debt proportion is more likely to default on its debt. If a company defaults on its debt, the lenders will have to take possession of the company’s assets in order to recover their losses. This can be a very costly and time-consuming process, and it is therefore something that lenders try to avoid.
As a result, the cost of debt increases as the debt proportion increases. This is because lenders are taking on more risk when they lend money to companies with a higher debt proportion.
Here is a brief explanation of each option:
- Option A: Increases. This is the correct answer. The cost of debt increases as the debt proportion increases.
- Option B: Decreases. This is the incorrect answer. The cost of debt increases as the debt proportion increases.
- Option C: Constant. This is the incorrect answer. The cost of debt is not constant. It increases as the debt proportion increases.
- Option D: None of the above. This is the incorrect answer. The correct answer is A.