• The well-known graph that represents the optimal (or best) capital structure we would expect to see for French Spaniel Company (or any typical firm) has which of the shapes described below?
• A.A frown or inverted u-shape, indicating that the cost of capital rises as we move from zero debt to some debt financing but then declines as a high debt proportion is reached.
• B.A smile or u-shape, indicating that the cost of capital declines as we move from zero debt to some debt financing but then rises as a high debt proportion is reached.
• C.A downward-sloping straight line, indicating that the cost of capital declines steadily as the proportion of financing provided by lenders continues to increase.
• D.A horizontal straight line, indicating that the cost of capital remains essentially the same regardless of the proportion of debt financing the company's managers employ.
• E.An upward-sloping straight line, indicating that the cost of capital rises steadily as the proportion of financing provided by lenders continues to increase.