Debt capital has a lower risk because the lenders have far stronger legal pressure against the company to make payment than do preferred or common stockholders.

Question

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Debt capital providers (such as banks or bondholders) have the legal right to demand payment and can take legal action, such as filing a lawsuit or seizing assets, if payments are not made as agreed. This gives them stronger legal pressure and makes their investment less risky than preferred or common stockholders, who have limited legal options if the company does not perform well.

Debt Capital Has a Lower Risk Because the Lenders Have