To estimate the optimal debt-to-capital ratio, our initial step is estimating the cost of equity and the cost of debt for various debt-to-capital ratios. The optimal debt-to-capital ratio is the one that results in the lowest cost of capital. During this process, when we increase the debt ratio, which of the following outcomes is expected to occur most likely?
None of the others
Cost of equity will remain unchanged but the cost of debt will go up
Cost of equity and cost of debt will both decrease
Cost of equity will go up and the cost of debt will remain unchanged
Cost of equity will go up but the cost of debt will go down
Cost of equity will go down but the cost of debt will go up
Cost of equity and cost of debt will both increase