The lower equity is as a proportion of total capital, all other things equal, the greater the risk borne by the other providers of capital.

Question

Quizplus · Accepted Answer

With lower equity as a proportion of total capital, the company has taken on more debt or other forms of financing such as bonds. This increases the risk to other providers of capital such as bondholders or lenders as they have less protection in case the company defaults. On the other hand, if a company has a greater proportion of equity, it is less risky for other providers of capital as equity holders bear the most risk in case of company failure.

The Lower Equity Is as a Proportion of Total Capital