Final answer:
The cost of equity would be expected to be lowest when the debt-to-equity ratio is zero, as there are no interest payments or increased financial risk from borrowing, although an optimal capital structure might include some leverage.
Step-by-step explanation:
the debt-to-equity ratio is zero:
The cost of equity would be expected to be lowest when the debt-to-equity ratio is zero, which is option (a). The debt-to-equity ratio measures the relative proportion of shareholders' equity and debt used to finance a company's assets. When a company has no debt (a debt-to-equity ratio of zero), the cost of equity is generally lower since there are no interest payments that can increase financial risk.
Moreover, without debt, a company does not risk insolvency due to fixed interest payments, which often translates to lower equity costs. However, too low a debt-to-equity ratio may also indicate that a company is not fully leveraging the potential benefits of financial leverage to increase returns to equity holders under the principle of optimal capital structure.