The more long-term debt in a firm's capital structure, the less the risk of default or bankruptcy.

Question

Quizplus · Accepted Answer

The statement is false. The more long-term debt a firm has, the higher the risk of default or bankruptcy as the firm has to pay interest and principal payments on the debt regardless of their financial performance. This increases their fixed obligations and reduces their flexibility to respond to changes in the business environment. High levels of debt can also lower the firm's credit rating and increase their cost of borrowing, further exacerbating the risk of default.

The More Long-Term Debt in a Firm's Capital Structure, the Less