Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

Question

Quizplus · Accepted Answer

Suppliers of equity capital face greater risk than suppliers of debt capital because equity is in a subordinate position to debt in the event of liquidation. Therefore, equity investors require higher expected returns than debt investors to compensate for this higher risk.

Due to Its Secondary Position Relative to Equity, Suppliers of Debt