As the proportion of debt in the capital structure increases, investors require a ____ return and the value of existing debt will ____.
A) higher; increase
B) higher; decrease
C) lower; increase
D) lower; decrease

Question

Quizplus · Accepted Answer

As the proportion of debt in the capital structure increases, the risk of default also increases. To compensate for this additional risk, investors require a higher return on their investment in the company. Therefore, the cost of debt increases, and the value of existing debt decreases due to the higher risk associated with it.

As the Proportion of Debt in the Capital Structure Increases