As the debt-equity ratio decreases when debt is not risk free:
A) debtholders require a higher expected return.
B) debtholders require a lower expected return.
C) the expected return on equity increases.
D) the expected return on assets increases.

Question

Quizplus · Accepted Answer

As the debt-equity ratio decreases, the firm becomes less leveraged, reducing the risk for debtholders, which leads to a lower required return on debt.

As the Debt-Equity Ratio Decreases When Debt Is Not Risk