As debtholders rank ahead of shareholders it is expected that the required rate of return on debt will be less than the required rate of return on shares.

Question

Quizplus · Accepted Answer

This statement is true. As debtholders have a higher priority in receiving repayment in case of bankruptcy or liquidation, they are exposed to lower risk compared to shareholders. Hence, the required rate of return on debt is relatively lower than the required rate of return on shares.

As Debtholders Rank Ahead of Shareholders It Is Expected That