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

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

Explanation:

As we know that debt financing is the cheapest source of capital but it could not be used in excess as it rises the financial risk in terms of high interest payments made to the debt holders

Also at the time of recession, the firm is not able to earn properly so it would be very difficult to make the fixed payments i.e. interest and principal payments

Also the weighted average cost of capital also rises in the case when there is an excess of debt financing

Hence, the option c is correct

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