Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Increasing the amount of firm debt increases the expected cash flows to equity holders because interest payments are tax-deductible, which can lower the firm's tax liability and potentially increase the amount of cash available to equity holders. However, it also increases the volatility of those cash flows due to the fixed nature of interest payments, which must be made regardless of the firm's financial performance, thereby increasing the financial risk to equity holders.

Which of the Following Statements Is Correct