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 of an investment, the higher the potential return should be to compensate for that risk. Therefore, a less-established company or a company with a high debt to equity ratio would be considered a riskier investment and would need to offer a higher potential return to lenders or investors to compensate for that risk.

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