If investors' aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms.Other things held constant, this would lead to an increase in the use of debt and a decrease in the use of equity.However, other things would not stay constant if firms used a lot more debt, as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.

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The statement is true. An increase in the slope of the SML indicates higher risk aversion among investors, which affects the required rate of return on equity more than the interest rate on long-term debt. As a result, firms would prefer more debt than equity financing. However, an excessive use of debt would increase the financial risk, causing a limitation to the shift toward debt.

If Investors' Aversion to Risk Rose, Causing the Slope of the SML