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

Question

Quizplus · Accepted Answer

Debt capital is generally considered less risky than equity because debt holders have a higher claim on assets in the event of liquidation, and they receive fixed interest payments. Therefore, they typically require lower returns compared to equity holders, who face more risk and expect higher returns.

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