A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
A) increase the proportion of common stock equity to decrease financial risk.
B) increase the proportion of long-term debt to decrease the cost of capital.
C) decrease the proportion of common stock equity to decrease financial risk.
D) increase short-term debt to decrease the cost of capital.

Question

Quizplus · Accepted Answer

Increasing the proportion of common stock equity will decrease financial risk as equity carries no obligation to make fixed payments like debt. This increased equity can lower the overall cost of capital and thus decrease the financial risk premium. Option B would increase financial risk as the firm would be more indebted, while options C and D would not be effective in decreasing financial risk.

A Corporation Has Concluded That Its Financial Risk Premium Is