All other things being equal, the lower the equity as a proportion of total capital, the greater the risk borne by the other providers of capital.

Question

Quizplus · Accepted Answer

When equity is lower as a proportion of total capital, it means that debt is a higher proportion of total capital. This means that lenders have more of their money at risk, making the investment riskier for them. In contrast, if equity is a higher proportion of total capital, it means that lenders have less of their money at risk and the investment is less risky for them.

All Other Things Being Equal, the Lower the Equity as a Proportion