A less-established company, or a company with a high debt to equity ratio, would be considered a riskier investment to the lender. Which of the following principles attests to this axiom?
A) direct relationship principle
B) compensating balance concept
C) risk/return trade-off
D) cost-benefit analysis

Question

Quizplus · Accepted Answer

The risk/return trade-off principle states that the higher the risk associated with an investment, the higher the potential return should be. A less-established company, or a company with a high debt to equity ratio, is considered riskier and therefore would require a higher potential return to attract lenders or investors. This principle recognizes that investors or lenders are willing to take on more risk only if they have the potential of earning a higher return.

A Less-Established Company, or a Company with a High Debt