The risk of the debt capital is less than that of other long-term contributors of capital because
A) they have a higher priority of claim against any earnings or assets available for payment.
B) they have a far stronger legal pressure against the company to make payment than do preferred and common stockholders.
C) the tax-deductibility of interest payments lowers the debt cost to the firm substantially.
D) all of the above.

Question

Quizplus · Accepted Answer

All of the given options are true, making option D the best choice. Debt capital has a higher priority of claim against earnings or assets, meaning they will be paid before other long-term contributors in case of liquidation or bankruptcy. Debt holders also have stronger legal protection, as failure to pay interest or repay principle may result in default and lead to legal repercussions. Additionally, the tax-deductibility of interest payments makes debt capital a more affordable option for companies, lowering their overall cost of capital.

The Risk of the Debt Capital Is Less Than That