By adding leverage,the returns on the firm are split between debt holders and equity holders,but equity holder risk increases because
A)interest payments can be rolled over.
B)dividends are paid first.
C)debt and equity have equal priority.
D)interest payments have first priority.

Question

Quizplus · Accepted Answer

By adding leverage, debt holders have priority in receiving interest payments before dividends are paid to equity holders. This increases the risk for equity holders as they may not receive any dividends if the company does not generate enough profits to cover both the interest payments and dividends. Therefore, option D is the best choice as it correctly identifies that interest payments have first priority over dividend payments, which is the main source of risk for equity holders in a leveraged firm.

By Adding Leverage,the Returns on the Firm Are Split Between