Within a firm,the required return on debt must be less than the required return on equity.

Question

Quizplus · Accepted Answer

This is because debt holders have a higher priority in receiving their payments compared to equity holders. In case of bankruptcy or liquidation, debt holders are paid off before equity holders. Therefore, to compensate for the lower risk of investing in debt, the required return on debt is lower than the required return on equity.

Within a Firm,the Required Return on Debt Must Be Less