The graph on page 6 of class 9 illustrates that once the debt issued by a company becomes risky, issuing additional debt causes the expected return on debt to increase at an increasing rate. Suppose the company continues to issue additional debt beyond the D/E ratio depicted in the figure. Is it possible that the company can issue so much debt that rd > ra? If so, how? If not, why not? Explain your reasoning.

Figure 17.2 illustrates how these rates of return vary with the level of debt in the capital structure. l'a, re, rd