An analyst has graphed the relationship between the expected return on a firm$$s capital and its debt$$equity $($D$/$E$)$ ratio. Her graph follows:

From what you see on the graph, which of the following assumptions is consistent with the graph?

Excessive financial leverage causes equity to become less risky than debt.

The firm$$s debt has no default risk.

If leverage increases, the cost of equity increases enough to keep the weighted average cost of capital constant.

Excessive financial leverage causes a decrease in the firm$$s EBIT.