The XYZ company currently has a debt-to-equity ratio of 20%. Assume no taxes and perfect contracting.

1:If the XYZ company decides to increase their debt-to-equity ratio to 40%, what will happen to their cost of equity?

A:The cost of equity will stay the same

B:The cost of equity will go down

C:The cost of equity will go up

2:If the XYZ company decides to increase their debt-to-equity ratio to 40%, what will happen to their total cost of capital?

A:The total cost of capital will go down

B:The total cost of capital will go up

C:The total cost of capital will stay the same