Question

A company is evaluating its debt-equity
mix. It observes that increasing debt reduces overall cost of capital up to a point, but beyond that the cost of equity rises sharply due to higher risk. Which theory of capital structure does this situation best represent?

A Net Income Approach
B Net Operating Income Approach
C Traditional Approach (Intermediate Theory)
D Modigliani-Miller Approach without Taxes
E Pecking Order Theory
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