Lower borrowing costs encourage the substitution of debt for equity in corporate capital structures,which increases financial risk.

Question

Quizplus · Accepted Answer

Lower borrowing costs make debt financing more attractive compared to equity financing, leading companies to increase their reliance on debt to finance their operations. This increases their financial risk, as the company becomes more indebted and is exposed to changes in interest rates that can affect its ability to service its debt obligations. Additionally, higher levels of debt can make a company more vulnerable to economic downturns or changes in market conditions that can negatively impact its financial performance.

Lower Borrowing Costs Encourage the Substitution of Debt for Equity