A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.
A) increase the proportion of long-term debt to decrease the cost of capital
B) increase the proportion of short-term debt to decrease the cost of capital
C) decrease the proportion of common stock equity to decrease financial risk
D) increase the proportion of common stock equity to decrease financial risk

Question

Quizplus · Accepted Answer

Increasing the proportion of common stock equity will decrease financial risk because equity financing is less risky than debt financing. This will result in a lower financial risk premium. However, increasing the proportion of debt (long-term or short-term) will increase financial risk and result in a higher financial risk premium.

A Corporation Has Concluded That Its Financial Risk Premium Is