In which of the following combinations of capital structuredo the common stockholders have to bear the maximum risk?
A) 100 percent equity
B) 100 percent debt
C) 50 percent equity and 50 percent debt
D) 25 percent equity and 75 percent debt
E) 75 percent equity and 25 percent debt

Question

Quizplus · Accepted Answer

With 25 percent equity and 75 percent debt, the common stockholders have to bear the maximum risk. This is because in case of financial distress or bankruptcy, debt holders are paid before equity holders. Therefore, if the company is unable to meet its debt obligations, the equity holders may end up with nothing.

In Which of the Following Combinations of Capital Structuredo the Common