A corporation that uses both debt and equity in its capital structure has concluded that the risk premium it must pay on its common stock is too high.To decrease this,the firm can ________.

Question

Quizplus · Accepted Answer

The risk premium on common stock is directly related to financial risk, which is the risk inherent in a company's capital structure. As such, decreasing the proportion of common stock equity (by increasing the proportion of debt) will decrease the financial risk and ultimately lower the risk premium on the common stock. Therefore, the best choice is to increase the proportion of common stock equity to decrease financial risk.

A Corporation That Uses Both Debt and Equity in Its