If a company went from "zero debt" (no debt, debt rtio=0) through successively higher levels of debt (debt ratio progressively increases) over time, why would you expect its stock prie to initially increase, then hit a pek, then begin to derease?

a) as the copany uses more debt financing, its income will initially increase, thus increasing stock price, but then decline as more debt is used and the added interest expenses become non-tax deductible.

b) The company's stock price will initially increase since net income, eps, and roe ("return") will increase due to the tax deductibility of interest expense. However, the stock price will peak, and then decrease as the "risk" associated with additional debt will "outweigh" the benefits of interes's tax deductability and financial leverage.

c) Initially the cost of debt (Kd) will be less than the cost of Equity/Required rate of Return (Ks). As more debt financing is used, Kd will increase above Ks. As Ks decreases, relative to Kd, the stock price will decrease.

d) As the company uses more debt financing, it will not use as much of equity financing. As such, Return on Equity will increase. ROE is the primary determinate of stock price.