13. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because

interest rates may change.
the firm's stock price will increase and raise the cost of equity financing.
the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
underwriting costs may change.

the financial risk of the firm may increase and thus drive up the cost of all sources of financing

the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

The correct answer is: the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

Debt financing is commonly known to be the cheapest component of capital because it typically has lower interest rates compared to other sources of financing, such as equity financing. However, like any form of financing, there are limitations on how much debt can be used.

One reason debt financing cannot be used excessively is the potential for interest rates to change. Interest rates are influenced by various factors such as market conditions, inflation, and central bank policies. If interest rates rise, the cost of servicing debt increases, which may strain the financial capability of a firm.

Another reason excessive debt financing is not advisable is the potential impact on the firm's stock price. When a company takes on excessive debt, it raises concerns about the riskiness of the firm. This increased financial risk may lead to a decrease in the firm's stock price, which would subsequently raise the cost of equity financing. Investors require a higher return to compensate for the higher perceived risk.

Additionally, the financial risk of a firm may increase as more debt is taken on. This heightened financial risk could result in credit rating downgrades, which in turn raises the cost of all sources of financing, including debt and equity. Lenders and investors demand higher returns as the perception of risk increases.

Underwriting costs, the fees associated with issuing debt securities, can change over time. However, while underwriting costs are a consideration, they are not the primary reason why debt financing cannot be used to excess.

In summary, excessive debt financing should be avoided because interest rates may change, the firm's stock price may decrease and raise the cost of equity financing, and the financial risk of the firm may increase, subsequently raising the cost of all sources of financing.