By adding leverage,the returns of 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.
E)interest payments are so high.

Question

Quizplus · Accepted Answer

When leverage is added, the interest payments to debt holders have first priority and must be paid before any dividends are paid to equity holders. This increases the risk for equity holders, as they may not receive any dividends if the company is unable to meet its interest payments.

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