An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.

Question

Quizplus · Accepted Answer

An increase in a firm's debt ratio will increase the financial risk of the firm, which may lead to an increase in the required rate of return for equity holders. This is due to the fact that higher debt levels increase the possibility of default, which may have a negative impact on the firm's profitability and share price. As a result, equity investors may demand a higher return to compensate for the increased risk.

An Increase in a Firm's Debt Ratio Will Have No