Which of the following statements is true regarding debt ratios?
A)Firms with relatively low debt ratios have higher expected returns when business is good.
B)Firms with relatively low debt ratios are exposed to more risk compared to firms with relatively high debt ratios.
C)Firms with relatively high debt ratios have higher expected returns when business is bad.
D)Firms with relatively high debt ratios have higher expected returns when business is good.
E)Firms with relatively low debt ratios have higher expected returns when business is poor.

Question

Quizplus · Accepted Answer

Firms with relatively high debt ratios are leveraged more, which means they can have higher returns when business is good due to the effect of leverage on their earnings. However, this also means they face higher risk, especially in bad times.

Which of the Following Statements Is True Regarding Debt Ratios